2013 Conference

Financial Services

Financial Services

In recent years, the consequences of the downturn in the economy have been evident in numerous consumer behaviors, including increased use of debt and more expensive financial products such as payday loans. The assumption in popular press reports and even in some scholarly work is that limited financial knowledge and skills are the likely explanations for these behaviors. Yet, even consumers with strong financial skills and knowledge may make questionable financial decisions during times of financial stress, such as after a sudden drop in income.  The aim of this paper is to test the hypothesis that financial knowledge has a different influence on financial behaviors for consumers with different incomes who are experiencing financial stress. The results can be relevant to public and private decision makers debating the relative merits of financial literacy education vs. income support programs.  The paper first reviews the literature, focusing on financial stress and its measurement. After describing the methodology, results are reported and implications are discussed.