Academic journal article The Economic and Labour Relations Review : ELRR

University Students' Financial Literacy Levels: Obstacles and Aids

Academic journal article The Economic and Labour Relations Review : ELRR

University Students' Financial Literacy Levels: Obstacles and Aids

Article excerpt


In the last decade, the need for financial education has become a policy issue, in the context of widening community access to increasingly complex financial products and services, rising levels of household debt and the need to fund retirement for an ageing population through superannuation schemes. This is particularly evident in countries such as Australia, New Zealand, the United Kingdom and the United States. The promotion of financial literacy can be seen as a means for the State to mitigate the social welfare issues which stem from poor financial decisions. Moreover, if placed in the context of financial services regulation, it can be viewed as a way for the State to fulfil its obligation to promote an 'efficient market' by increasing market participation and ensuring that participants are fully informed in terms of making financial decisions.

Adherents of the Efficient Market Hypothesis (EMH) (Fama 1970) hold that prices in financial markets efficiently average out the incorrect choices of individuals. Critics of the hypothesis point to the obvious anomaly of speculative bubbles, with irrational investor behaviour long outlasting individuals' ability to remain solvent (Keynes, cited in Lowenstein 2000: 123). Since the 1990s, behavioural economics and behavioural finance theories have explored the specific cognitive biases that are likely to lead to poor financial choices, such as the discounting of future value. Such biases, it is argued, may be mitigated by financial literacy education (Thaler and Sunstein 2009).

While there is no standard definition for financial literacy, a number of attempts to define the term have been made. A comprehensive list of various definitions can be found in Appendix 2 of Huston (2010: 311). It is a broad term and encompasses a basic level of knowledge and skills in areas such as superannuation, taxation, estate planning, home ownership, investments, debt and risk management, annuities and welfare benefits. The Ministerial Council for Education, Early Childhood Development, and Youth Affairs (MCEECDYA) in Australia defines financial literacy as 'the application of knowledge, understanding, skills and values in ... financial contexts and the related decisions that impact on self, others, the community and the environment' (MCEECDYA 2009).

In addition to resulting in poor financial decision making, low levels of financial literacy have been linked to high levels of personal and household debt (Lusardi and Tufano 2009); poor health (Joo and Garman 1998); adverse health choices (Peters et al. 2007); inadequate retirement planning (Lusardi and Mitchelli 2007); and poorer general life outcomes. It has also been found (De Bruin et al. 2010) that individuals with lower financial literacy levels are more likely to have higher inflationary expectations which further exacerbate the negative social and economic consequences of poor financial literacy.

The financial literacy of young people is critical as they enter adulthood and are faced with a huge array of financial products and services to choose from at a time when they are also embarking on major financial and life cycle events such as commencing employment, moving out of home, purchasing their first car, entering marriage, starting a family or securing a mortgage. In addition, lifestyle aspirations spurred on by the influence of advertising and the media are also likely to increase young people's reliance on debt (Fear and O'Brien 2009). Ill informed financial decisions in the early part of their lives can potentially have disastrous consequences which may affect them later in life. Such consequences may include huge debt, poor credit ratings, or adverse outcomes for health, retirement and quality of life.

We might intuitively expect that those young people who have the highest levels of literacy and numeracy overall--university students--would also have higher than average levels of financial literacy. …

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