Financial Competence and Expectations Formation: Evidence from Australia

Abstract

We study the financial competence of Australian retirement savers using self-assessed and quantified measures. Responses to numeracy and basic and sophisticated financial literacy questions show large variation and compare poorly with international surveys. We graph the relationships between financial competence index scores and a wide range of demographics, economic outcomes and attitudes. Results show significant variation of basic and sophisticated financial literacy measures with most demographics, self-assessed financial competence, income, superannuation accumulation and net worth. General numeracy scores show patterns of variation different to basic and sophisticated financial literacy, being largely constant by gender, age, higher education and personal income. Our results confirm the usefulness of studying numeracy and financial knowledge-based skills separately. We also consider the impact of financial competence on expectations of stock market performance. Consumers with higher understanding of risk, diversification and financial assets are more likely to assign a probability to future financial crises, and a time-frame to share market recovery, rather than expressing uncertainty.

Keywords: retirement savings, financial literacy, uncertainty

JEL Classification: G23, G28, D14