“A review of models for measuring financial literacy, addressing their strengths and limitations from an educational perspective.”
Have you ever received training on budget management at school, university or work? In France, 85% of people have never taken a course in budgeting and finance as part of their school education. However, a good financial and economic culture is essential, at all stages of life, in order to make the right decisions, take out a student loan, buy a house, save or choose a supplementary pension.
As part of the new Engage 2025 strategic plan, led by Stéphane Richard, Orange is committed to digital equality and wants to accelerate the conquest of all its growth areas, including financial services. In this way, Orange can offer a new banking experience that empowers people. Providing them with the necessary financial culture, therefore, seems like the right thing to do.
This paper is part of a PhD research project on financial literacy, backed by Orange and the University of Nantes. The purpose of this thesis is twofold: to define the frameworks for financial literacy tailored to young adults and their financial situations and to propose recommendations for an educational tool.
Financial education is about how best to manage your money based on your life goals and economic circumstances. It should enable individuals to make informed financial decisions. Financial literacy is all the more essential in a digital world that gives the customer a considerable amount of autonomy. A previous article available on this blog , entitled Financial literacy, an essential awareness, highlights the benefits of improved financial literacy and identifies the French as poor financial students.
Recognising the value of financial literacy and the issues involved, several institutions have sought to measure the levels of financial literacy found among both young people and adults at a global, European and national level. The level of literacy, which has been closely monitored for several years, is based on a definition of financial competence popularised by research by the OECD (Organisation for Economic Cooperation and Development). However, it seems that this can also be supported by other studies on the subject.
This article focuses on existing models for measuring financial literacy, addressing their strengths and limitations from an educational perspective with the aim of providing initial thoughts on how a financial education scheme could be designed.
Financial literacy and the financial competence model
It was during the 2000s that the notion of financial literacy gained momentum around the world, initially studied by sociologists and financial experts. The global organisation OECD quickly took up the issue. In its first report “Improving Financial Literacy”, the OECD highlighted the importance of a good level of financial literacy for individual well-being and identified it as a key factor in preventing financial risks and improving financial well-being.
Defining “financial literacy” was the first step in building a model designed to measure it. The OECD and its experts described financial literacy as “the knowledge and understanding of financial concepts and risks, as well as the skills, motivation and confidence to apply that knowledge and understanding in order to make effective decisions across a range of financial contexts, to enhance individual and societal financial well-being and to enable participation in economic life” . This definition of financial literacy reflects the need both to understand financial reasoning and behaviour and to measure the knowledge and concepts acquired in relation to a subject .
Assessment of financial literacy, on the other hand, is unchanged from 2000 to the present and is based on three aspects:
- Content, or the knowledge and understanding of the key elements for interacting effectively within the financial sphere.
- Topics included are: money and transactions, financial planning and management, risk and return, and the financial landscape.
- Processes, i.e. mental strategies and cognitive resources in order to accomplish a task.
- This is divided into four tasks: identifying financial information, analysing the information in a financial context, evaluating the financial issues and applying known and understood financial concepts.
- Context, i.e. situations that call for knowledge and know-how. These situations differ from person to person and change over time.
- This includes four contexts: school and work, household and family, individual, and community.
So-called “non-cognitive” factors are also measured: access to education, access to money and financial products, attitudes toward financial products, self-confidence in this area, and spending and saving behaviours .
These three aspects were used to define three points of measurement for “financial competence” :
The OECD’s PISA study focuses on the level of attainment of children under the age of 15 in over 15 countries.
The OECD’s PIAC survey measures the level of attainment of adults over the age of 18 in over 40 countries.
These studies consist of a series of questions, either multiple choice or free choice, relating to the different topics listed above.
PISA example: Colin has a credit of 30 zeds on his phone. He sends the word MONK by SMS to 13 45 67.
Colin doesn’t make any other calls or send SMS messages using his phone. He doesn’t add any more credit.
How much credit will Colin have on his phone exactly one week later?
PIAC example: Imagine that five <brothers> receive a gift of <$>1,000 in total. If the <brothers> have to share the money equally, how much does each person get?
Table 1: Methodology of the OECD studies
|Mastery of key concepts (interest rates, division, savings, inflation, investment, etc.)|
|Beliefs, preferences, relationship to money, satisfaction with saving, day-to-day management, etc.|
|Behaviour when faced with decisions, personal choices, problematic situations or problems to solve.|
This is, to date, the most widely used model for measuring financial literacy.
However, there are other assessment methods, in the form of questionnaires.
Other models of financial literacy
The Big Three, a model for measuring financial literacy
One of the first benchmark studies in financial literacy was the U.S. 2004 Health and Retirement Study (HRS), which included questions on this subject. It established the basis of a model for conducting studies in the financial field, called the Big Three. Based on three concepts—compound interest, inflation and risk diversification —this model measures cognitive performance by means of mathematical problems on the concepts of interest and inflation, and measures understanding of each concept. This model has been used many times in different studies, sometimes in a modified form. For example, the Word Bank 2014 FinLit Survey, conducted by Lusardi et al, took this model and added a fourth aspect—simple interest—to monitor financial literacy around the world . The Allianz study, conducted in collaboration with Lusardi, used the Big Three unaltered in order to measure the level of financial knowledge and understanding of risk in ten European countries , while the French PATER study in 2011 integrated these three concepts into a range of questions related to the understanding of financial concepts.
Table 2: The Big Three methodology
A questionnaire comprising three questions based on the concepts of compound interest, inflation and risk diversification.
The three questions in the study (translated into French in the PATER study):
- Suppose you had €1000 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow? (“Less than €1100”, “Exactly €1100”, “More than €1100”, “Do not know” , “Refuse to answer”).
- Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account? (“More than today”, “Exactly the same”, “Less than today”, “Do not know”, “Refuse to answer”).
- Here is a list of four financial products. Rank them from 1 to 4, from least risky to most risky, in your opinion: “Savings account”, “Shares”, “Bonds”, “SICAV/mutual fund (Fond Commun de Placement—FCP)”, “Do not know”, “Refuse to answer”.
One other measurement model is that developed by Atkinson et al . Based on financial knowledge, attitude and behaviour, the authors identified five concepts. These concepts fall within the framework of financial competence and include details of the desired preconditions for each. This model was designed to measure financial literacy and to propose a reference model and questionnaire. Notably, it has been used to measure the level of financial literacy in Canada and the effects of financial literacy initiatives among vulnerable or low-income groups .
Table 3: Areas and aspects of the Atkinson study
|Making ends meet|
|Choosing financial products|
|Planning for the future|
|Staying informed/getting help|
|Understanding how to make ends meet|
|Understanding how to keep accounts|
|Understanding how to choose financial products|
|Understanding how to plan for the future|
|Understanding where and how to obtain information and help|
|Confidence and motivation to make ends meet|
|Confidence and motivation in keeping accounts|
|Confidence and motivation in choosing financial products|
|Confidence and motivation in planning for the future|
|Confidence and motivation in obtaining information and help|
|Making ends meet in practice|
|Keeping accounts in practice|
|Choosing financial products in practice|
|Planning for the future in practice|
|Staying informed and getting help in practice|
|Source: Adapted from Kempson, Collard and Moore (2005)|
Qualitative questionnaires in France:
Finally, we should mention a few studies that measure financial literacy by asking a wide range of questions. The Audencia barometer , launched in 2014, which measures the financial vulnerability of the French; the IFOP (Institut français d’opinion publique—French Institute of Public Opinion) survey of 2016  regarding the knowledge and habits of the French; the survey by the Harris Interactive institute  on financial literacy in children. Often organised by financial organisations and financial experts, a certain degree of consistency can be seen across these studies, which are largely inspired by the OECD’s Anglo-Saxon model, making the results easily comparable.
Table 4: Example questions
Example questions in these studies:
Audencia 2014, which studied the vulnerability of the French using the OECD and Big Three models: “Imagine that you have €100 (with no fees) in a savings account that pays 2% per year. If you don’t make any payments or withdrawals, how much will you have at the end of a year, once interest has been paid?”
IFOP 2016, which studied the knowledge and habits of the French using the Big Three: “Do you know the current annual interest rate of the Livret A?”; “What do you think revolving credit is?”
Harris 2019, which studied knowledge and practices among children: “To save money, do you think you could…? – wait for the sales? – not buy certain things? – look for the best price? – buy second-hand items?”
This article discusses the structure and objectives of some of the models for measuring financial literacy and also highlights the limitations of their approaches.
The limitations of financial literacy measurement models
One of the first limitations is the individualistic approach, which focuses on individual situations and actions by the person and therefore ignores economic socialisation and the sharing of knowledge and skills with peers at different stages of life (parents, friends, financial advisors, etc.) . However, it appears that interactions and experiences with others play an important role in acquiring budgeting and decision-making strategies, starting in childhood : children imitate their parents, teenagers compare their pocket money with friends, etc.
In this vein, it may also be noted that these models promote financial literacy primarily via the dissemination and acquisition of content. They minimise the importance of context and the situations experienced by individuals in which they encounter financial concepts: paying for education and taking out a loan, preparing for the future and saving, etc. Rather than addressing issues on the basis of learning stages often linked to age, the understanding of financial concepts could be built around a situational approach. This would then focus on encountering a problematic situation and solving it as a vehicle for learning.
In referring to the OECD approach, Henchoz points out that in the application of this knowledge, the differences and diversity among individuals are erased or diminished. This serves to challenge a model of financial competence that takes a uniform view of individuals’ capacity and again ignores the importance of the context in which tacit knowledge is put into practice. The author also highlights the problem of the causal link between low levels of financial literacy and economic hardship for the individual; the two are not automatically correlated, but rather dependent on contextual and individual factors.
It also appears that the acquisition and application of knowledge cannot on their own predict good budgeting skills, but that attitude, personality and social factors (environment, behaviour, attitudes, knowledge, confidence and income, etc.) impact financial behaviour and decision-making . Consequently, financial literacy cannot be reduced to an approach that focuses on the acquisition of knowledge and skills; rather, it should focus on the contexts of the individual’s life and the requirements of the situation in which this knowledge will be applied.
In considering the term “competence” used in these models, we must acknowledge the fact that this has been reduced to the level of tacit knowledge and has scarcely been analysed from the perspective of operational competence. In other words, from knowledge to know-how. Competence does not simply take the form of action; it comprises a range of non-observable factors, processes, problem-solving mechanisms, reasoning and values—adapting to the situation, acting in the moment, making decisions, implementing and adjusting strategies, etc. . Rather than competence, financial literacy studies is based more on educational objectives.
Lastly, the sheer volume and variety of benchmarks make it increasingly difficult to identify a standard model for financial literacy that represents the consensus. There is also a tendency to use these concepts and terms for ulterior motives or political ends: financial literacy to save for retirement, spending intelligently to boost the economy or to become rich, etc. These ideas all represent a stereotypical approach to the field that is seen frequently across multiple digital networks. Financial literacy should first and foremost be about supporting and helping people to understand the issues and concepts that are important to them when managing their daily finances.
Studies on the level of financial literacy are regularly carried out in the form of various questionnaires. These provide information on the level of knowledge and understanding of financial concepts at a national and international level.
The financial competence model is a widely used tool, enabling the issues being measured to be transposed into different economic and social contexts, and provides benchmarks to support the studies. The OECD definition of financial literacy, currently the most frequently cited in the application of these studies, allows for this adjustment to different economic and political contexts in that it encompasses multiple concepts that refer simultaneously to individual situations, to budget management and to financial well-being.
Providing a benchmark and clear definition has served to highlight the benefits of a good level of financial literacy and lent importance to this topic by alerting financial organisations to the general low level. While more an objective-based specific measurement model than a competence-based model that allows for an understanding of how knowledge is acquired and applied practically in context, this model and its studies have identified financial literacy as a contributing factor to individual well-being and have prompted the launch of several national initiatives .
Financial education today tends to be both an aid to understanding the financial system and, at the same time, a training tool for financial organisations and practitioners. This can only be done by emphasising the importance of situational learning in financial education.
In conclusion, a number of models created via measurement testing demonstrate the importance of the subject and show an international awareness. Although definitions of financial literacy have emerged, they are still being constantly re-evaluated to best fit any financial context. Research work on this topic is in full flow.
The next stage of the research initiated here will present the results of the first studies carried out that categorise the different financial contexts and profiles seen among young adults. This will be followed by work that focuses on defining problematic financial situations that involve the application of financial concepts and on initial recommendations for a financial literacy solution.
 OECD. (2016). OECD/INFE International Survey of Adult Financial Literacy Competencies.
 OECD. (2019). PISA 2018 Financial Literacy Framework.
 OCDE. (2016). Cadre d’évaluation de la culture financière de l’enquête. PISA 2015.
 Selon les études de Kempson et al. 2005; Kempson, 2009 ; Atkinson & Messy, 2012 ; OECD/INFE, 2013; OECD/INFE ; 2017 ; OECD/INFE, 2018
 Lusardi, & Mitchell. (2011). Financial Literacy around the World : an over view. NBER Working Paper Series.
 Klapper, Lusardi, & Oudheusden. (2014). Financial Literacy Around the World : insights from the standards & poor’s ratings services global financial literacy survey.
 Allianz. (2017). When will the penny drop? Money, financial literacy and risk in the digital age. International Pension Papers.
 Kempson, Collard, & Moore. (2005). Measuring financial capability: an exploratory study. Financial Services Authority.
 Audencia. (2015). Baromètre Audencia. Enquête sur la Vulnérabilité Financière des Français.Rapport.
 SEDI. (2012). Le bien-fondé de l’éducation financière : évaluer les effets des interventions en matière d’éducation financière sur les groupes vulnérables et à faible revenu au Canada. Rapport.
 Harris Interactive/FBF. (2019). Les enfants et l’éducation financière.Rapport.
 IFOP. (2016). Education financière : Connaissances et pratiques des Français. Rapport.
 Mileti, Plomb, & Henchoz. (2014). De la socialisation financière à l’autonomie économique : Processus d’acquisition des compétences et des représentations liées à l’argent auprès d’étudiants vivant en Suisse. Pensée plurielle, n° 37(3), 53‑65.
 Roland-Levy. (2014). De la psychologie sociale à la psychologie économique en passant par la psychologie politique, Les cahiers psychologie politique [En ligne], numéro 5, URL : http://lodel.irevues.inist.fr/cahierspsychologiepolitique/index.php?id=1302
 Henchoz. (2015). Journée d’économie politique, Iconomix : Education financière : le rôle des écoles.Rapport.
 ACFC. (2019). Utiliser la recherche pour améliorer le bien-être financier des Canadiens : Compte-rendu du symposium.
 Guillemette, & Gauthier. (2008). L’Approche par compétences (APC) en formation des maîtres: Analyse documentaire et critique. Recherches & éducations. [En ligne) Articles Inédits. URL : http://journals.openedition.org/rechercheseducations/84
 AFG. (2019). Livret Blanc. Education financière, des épargnants éclairés; acteurs de l’économie de demain.
 Kempson. (2009). Framework for the Development of Financial Literacy Baseline Surveys: A First International Comparative Analysis. OECD Working Papers on Finance, Insurance and Private.
 Atkinson, & Messy. (2012). Measuring financial literacy : resultats of the OECD INFE pilot study.
 OECD. (2013). OECD/INFE Toolkit to measure financial literacy and inclusion. Guidance, core questionnaire and supplementary questions.
 OECD. (2017). G20/OECD INFE report on adult financial literacy in G20 countries.
 OECD. (2018). OECD/INFE Toolkit for Measuring Financial Literacy and Financial Inclusion.