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89 Fed. Res. Bull. 309 (2003)
Household Financial Management: The Connection between Knowledge and Behavior

handle is hein.journals/fedred89 and id is 791 raw text is: Household Financial Management:
The Connection between Knowledge and Behavior

Marianne A. Hilgert and Jeanne M. Hogarth, oJ the
Board's Division of Consumer and Community
Aftaiirs and Sondra G. Beverh.I of the University qf
Kansas, prepared this article.
Across the decade of the 1990s to the present, the
issue of financial education has risen on the agendas
of educators, community groups, businesses, govern-
ment agencies, and policymakers) This increased
interest in financial education has been prompted by
the increasing complexity of financial products and
the increasing responsibility on the part of individu-
als for their own financial security. Well-informed,
financially educated consumers are better able to
make good decisions for their families and thus are
in a position to increase their economic security and
well-being. Financially secure families are better able
to contribute to vital, thriving communities and
thereby further foster community economic develop-
ment. Thus, financial education is important not only
to individual households and families but to their
communities as well.
Knowledgeable consumers who make informed
choices are essential to an effective and efficient
marketplace. In classical economics, informed con-
sumers provide the checks and balances that keep
unscrupulous sellers out of the market. For instance,
consumers who know the full range of mortgage
interest rates and terms in the marketplace, who
understand how their credit-risk profile and personal
situation fit with those rates and terms, and, conse-
quently, who can determine which mortgage is best
for them make it difficult for unfair or deceptive
lenders to gain a foothold in the marketplace.
Amid growing concerns about consumers' finan-
cial literacy, the number and types of financial edu-
cation programs have grown dramatically since the
NOTE. Chris Anguelov, of the Board's Division of Consumer and
Community Affairs, assisted with additional analysis of the Survey of
Consumer F inances data. Jane Sctuchardt and Sommer Clarke, of the
U.S. Department of Agriculture. and Manisha Sharma. of the Board's
Division of Consumer and Community Affairs, conurbited to the
development of the survey design and questionnaire.
1 See Sandra Braunstein and Carolyn Welch, 'Financial Literacy:
An Overview of Practice, Research. and Policy, Federal Reserve
Bulletin, vol 87 (November 2002), pp 445-57.

mid-] 990s.2 Many of these programs focus on pro-
viding information to consumers and operate under
the implicit assumption that increases in information
and knowledge will lead to changes in financial-
management practices and behaviors. Whether that is
the case is the province of behavioral economics,
which offers its blend of psychological and economic
insights   into   household    financial    management.
Behavioral economics acknowledges the role that
psychological characteristics (such as procrastina-
tion, regret, risk aversion, compulsiveness, generos-
ity, altruism, and peer pressure) play in household
economic decisions. Thus, behavioral economics
offers a framework for studying behaviors that seem
inconsistent or irrational-for example, consumers
who hold money in a savings account earning interest
at 2 percent while carrying balances on credit cards
and paying 18 percent interest.3
This article explores the connection between
knowledge and behavior-what consumers know
and what they do--focusing on four financial-
management activities: cash-flow management, credit
management, saving, and investment. Data are from
2. Several researchers and organizations have developed catalogs
of programs, For examples, see Lois A. Vitt, Carol Anderson, Jamie
Kent, Deanna M. Lyter, lurte K. Siegenthaler. and Jeremy
Ward. Personal Finance and Ihe Rush to Competence: Financial
Literacy Education in the US. (Fannie Mae Foundation. 2000)
(www.fanniemaefonndaion.org/pirogi-aiiis/pdlT/rep ftititeiracy.pdf).
Katy Jacob. Sharyl Htndson, and Malcolm flush, Tools For Surivatl:
An   Anahsis of  Financial Literacy  Programs for Lower-
Itcome Families (Chicago, Ill.: Woodstock Institute, 2000):
Jump$oart Coalition, iurnp$tart Personal Finance Clearinghouse
(wwwv.vuimpstart.or/idb/jssearch cfin) National Endowment to
Financial Education. Econornic Independence Clearinghouse
(2001) (www.iiefeorg/amexeconfuind/index.html). Neighborhood
Reinvestment Corporation NeighborWorks . Annotated Refer-
ence Guide for the NeighborWorks - ' Campaign for Home Owner-
ship 2002 (August 2001) lwww.iNvw.org/network/puh. AndMedia/
publications/catalog/pubs/annoRefGuide.pdf).
3. Sendhil Mullainathan and Richard H. Thaler. 'Behavioral Eco-
nonics; National Bureau of Economic Research Workiug Paper
uno. w7948 (National Bureau ('f Economic Reseach. (October 2t)00)
(www.nberorg/papers/w7948): Anos Tersky and Daniel Kahneman.
Rational Choice and the Franting of Decisions, Joiunal of Busi-
ness, vol. 59 (October 1986). pp. $251 278: Amos 'versky arid
Daniel Kahneman, Loss Aversion in Riskless Choice: A Reference-
Dependent Model, Quarterly Journal qt Eononics. vol. 106
(November 1991), pp. 1039-6l Thonas Gilovich. Dale Gritin. and
Daniel Kahneman, eds.. Hetristics and Biases: The Ps chologe of
hutuitive J.ldgerntet (Cambridge: Cambridge University Press, 20102).

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