Measurement error in research on financial literacy: How much error is there and how does it influence effect size estimates?

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Abstract

Financial literacy is often measured with only three to five questions, suggesting challenges with achieving respectable levels of internal consistency reliability. Based on our review, we found financial literacy tests composed of three and five test questions yielded mean reliability estimates of 0.40 (k = 7; N = 167,075) and 0.54 (k = 8; N = 57,937), respectively: values less than minimally acceptable for even exploratory research. Based on our more comprehensive review of 52 samples and a variety of financial literacy tests (3–45 questions), researchers are recommended to measure financial literacy with a minimum of 13–15 questions. Finally, we conclude that the potential impact of financial literacy on various outcome variables has been underestimated substantially in many previous investigations, as the relatively low levels of internal consistency reliability in the financial literacy test scores attenuated the obtained effects estimated from the observed scores.

Original languageEnglish
Pages (from-to)938-956
Number of pages19
JournalJournal of Consumer Affairs
Volume56
Issue number2
Early online date2021
DOIs
Publication statusPublished - 1 Jun 2022

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