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Who is in control? The role of self-perception, knowledge, and income in explaining consumer financial behavior.



The current research examines the relationship between consumer financial knowledge, income, and locus of control locus of control
n.
A theoretical construct designed to assess a person's perceived control over his or her own behavior. The classification internal locus indicates that the person feels in control of events; external locus
 on financial behavior. Ethnicity ethnicity Vox populi Racial status–ie, African American, Asian, Caucasian, Hispanic  is included as a potential moderator moderator - A person, or small group of people, who manages a moderated mailing list or Usenet newsgroup. Moderators are responsible for determining which email submissions are passed on to the list or newsgroup.  of the effects of these three variables on financial behavior. Findings suggest that consumers' propensity to save, budget, and control spending depends partly on their level of perceived control over outcomes as well as knowledge and financial resources. Evidence of race and ethnicity as moderators is mixed.

**********

Failure to manage personal finances can have serious long-term, negative social and societal so·ci·e·tal  
adj.
Of or relating to the structure, organization, or functioning of society.



so·cie·tal·ly adv.

Adj.
 consequences. Financial service providers including credit card companies and other lending institutions as well as social marketers claim that the high incidence of bankruptcies, credit problems, poor savings rates, and impulse buying impulse buying ncompra impulsiva  are largely a result of a lack of financial knowledge on the part of consumers. Chang and Hanna (1992) argue that this lack of understanding is due to the fact that many sources of financial information are complex and inaccessible to the average consumer. Several studies conclude that both poor financial information and unrealistic expectations (Taylor and Overbey 1999) as well as a complete lack of information (O'Neill, Bristow, and Brennan 1999; Schuchardt 1998) contribute to a future economic picture that "could be a maze maze, detail of landscape gardening based on the Greek labyrinth, consisting of intricate paths or alleys lined with high hedges and having a center and exit difficult to find. It was a prominent feature in the formal English gardens of the 17th and 18th cent.  of conflict, debt delinquencies and unpaid bills unless efforts to educate and counsel students about money matters are increased" (Taylor and Overbey 1999, 41). A number of government regulatory agencies, consumer groups, and financial institutions have developed consumer education and outreach programs designed to increase consumers' financial literacy Financial literacy is the ability of individuals to make appropriate decisions in managing their personal finances. Raising levels of financial literacy is now a focus of government programmes in countries including[1] Australia, Japan, the United States and the UK. , with a particular focus on minority consumers. As a result, there are a wide variety of approaches to teaching consumers about financial matters currently in use, the majority of which focus on increasing financial knowledge as a means of changing or improving financial management behavior. There has been little empirical study of the relationship between knowledge and behavior, which is important to know in order to assess whether the current strategies are even addressing the fight issue.

The current research examines consumer financial knowledge along with individual differences in income and perceived control over outcomes, measured as locus of control (LOC LOC - lines of code ), and their relationship with reported financial management behavior. Specifically, we examine the effects of income, self-assessed financial knowledge, and LOC as well as the interaction between these variables on responsible financial management behavior. We define responsible financial behavior as the respondent's self-assessed propensity to budget, save money, and control spending. Additionally, consumer ethnicity is included as a potential moderator of these relationships.

Locus of Control

The LOC construct is defined as a general, relatively stable propensity to see the world in a particular way, capturing general beliefs about the causes of rewards and punishments (Rotter 1966). Individuals with an internal LOC generally expect that their actions will produce predictable outcomes and thus are more action oriented o·ri·ent  
n.
1. Orient The countries of Asia, especially of eastern Asia.

2.
a. The luster characteristic of a pearl of high quality.

b. A pearl having exceptional luster.

3.
 or motivated than externals (Hoffman, Novak and Schlosser 2000). Individuals with an external LOC perceive events as being under the control of luck, chance, or powerful others, and as such are less likely than internals to master the skills necessary to accomplish their goals or demonstrate goal-directed arousal arousal /arous·al/ (ah-rou´z'l)
1. a state of responsiveness to sensory stimulation or excitability.

2. the act or state of waking from or as if from sleep.

3.
 (Zimmerman 1995).

Research shows that individuals' self-concept/self-perception influences both financial and nonfinancial preferences and behavior (Hira and Mugenda 1999; Onkivisit and Shaw 1987; Prince 1993). Rubenstein (1981) concludes that how people feel about money depends on how they feel about their lives. More specifically, Tokunaga (1993) and Davies and Lea (1995) find positive relationships between external LOC and the accumulation of credit card debt Credit card debt is an example of unsecured consumer debt, accessed through ISO 7810 plastic credit cards.

Debt results when a client of a credit card company purchases an item or service through the card system.
. Given these findings, Hira and Mugenda (1999) call for financial advisors and educators to recognize that financial beliefs and behaviors meet and are driven by sociopsychological so·ci·o·psy·cho·log·i·cal  
adj.
1. Of or relating to social psychology.

2. Of, relating to, or combining social and psychological factors.
 needs as well as practical and financial ones.

The above theory describes internals as more action oriented, motivated, and likely to perform difficult tasks than externals. Given these findings, we predict that externals will be less likely to expend ex·pend  
tr.v. ex·pend·ed, ex·pend·ing, ex·pends
1. To lay out; spend: expending tax revenues on government operations. See Synonyms at spend.

2.
 the effort necessary to demonstrate more responsible financial management behavior. This prediction is reflected in Hypothesis 1.

H1: There is a negative relationship between external LOC and responsible financial management behavior.

Financial Knowledge

There are a variety of sources through which knowledge can be acquired, all at varying levels of quality or reliability. These include formal education, such as high school or college courses, seminars and training classes outside of school, as well as informal sources, such as from parents, friends, and work (Keller and Staelin 1987; Lee and Hogarth 1999). In addition to these sources of information, many consumers learn about financial matters through negative personal experiences, i.e., the "school of hard knocks The School of Hard Knocks is an idiomatic phrase meaning the (sometimes painful) education one gets from life, often contrasted with formal education. It is a phrase which is most typically used by a person to claim a level of wisdom imparted by life experience, which they consider ." While the general belief is that people learn best from experience (Hoch and Ha 1986), most research also suggests that learning from experience is difficult (Brehmer 1980; Einhorn and Hogarth 1978; Hogarth and Hilgert 2002).

A number of accounts in the popular press as well as in the economic psychology literature speak to the importance and use of consumers' financial information and knowledge. Recent consumer finance trends underscore The underscore character (_) is often used to make file, field and variable names more readable when blank spaces are not allowed. For example, NOVEL_1A.DOC, FIRST_NAME and Start_Routine.

(character) underscore - _, ASCII 95.
 this importance and have sparked a renewed interest in and concern for the financial future of consumers. According to according to
prep.
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

3.
 the Jump Start Coalition for Personal Financial Literacy, America's young people are leaving school without any basic skills in personal finance, putting them at high risk of becoming adults who end up over their heads in debt, in bankruptcy court bankruptcy court n. the specialized Federal court in which bankruptcy matters under the Federal Bankruptcy Act are conducted. There are several bankruptcy courts in each state, and each one's territory covers several counties. , or without adequate savings to retire. In a survey of 1,500 high school students, on average, students answered just 57.3% of the 31-question financial management quiz correctly. Only 10.2% scored a "C" or better (Mandell 1997). As a proposed solution to this growing problem, many researchers have concluded that providing consumers with formal sources of financial information and education may help them achieve more appropriate levels of debt, spending, and saving. In a series of studies, Hogarth and Hilgert (2002) and Hilgert, Hogarth, and Beverly (2003) found that consumers who are financially knowledgeable are more likely to behave in financially responsible ways. Thus, existing research, as well as applied findings, leads to the second hypothesis regarding the effects of ability on consumers' responsible financial management behavior.

H2: There is a positive relationship between financial knowledge and responsible financial management behavior.

Income

It would seem most likely that individuals with more available resources would demonstrate more responsible financial management behavior, given that their available funds give them the opportunity to act responsibly. Hilgert, Hogarth, and Beverly (2003) report that according to the 2001 SCF SCF Service Canadien des Forêts (Canadian Forest Service)
SCF Stem Cell Factor
SCF Scientific Committee on Food (European Commission)
SCF Service Canadien de la Faune
, respondents with lower incomes were less likely to report paying their bills on time than those with higher incomes. In addition, Aizcorbe, Kennickell, and Moore (2003) found that families with lower incomes are less likely to report saving behavior. While this seems like a somewhat obvious prediction, a model of financial behavior would be incomplete without its inclusion.

H3: There is a positive relationship between income and responsible financial management behavior.

In addition to these main effects, we predict that indirect effects between these variables exist. Indirect or mediation effects occur when an independent variable influences the dependent through its effects on or as a result of a mediator variable A mediator variable (or mediating variable) in statistics is a variable that describes how rather than when effects will occur by accounting for the relationship between the independent and dependent variables.  (Baron and Kenny 1986). In this case, financial knowledge is the independent variable and LOC serves as the mediator variable. Specifically, we predict that financial knowledge affects LOC, a non-situation specific individual characteristic, which in turn affects behavior. That is, the ways in which individuals apply their knowledge will depend on whether they believe that they have control over outcomes. Following this reasoning, we predict that the relationship between financial knowledge and behavior is mediated me·di·ate  
v. me·di·at·ed, me·di·at·ing, me·di·ates

v.tr.
1. To resolve or settle (differences) by working with all the conflicting parties:
 by LOC.

H4: The relationship between financial knowledge and responsible financial management behavior is mediated by LOC.

In addition to the relationship between financial resources and responsible financial management behavior suggested in Hypothesis 3, we test for indirect effects of financial resources, i.e., income on responsible financial behavior. To examine these effects, we look to research on self-efficacy, a construct closely related to LOC. Self-efficacy refers to an individual's belief in a particular context or situation that he/she has the resources, options, and ability to successfully execute the behavior required to produce an outcome (Lazarus and Folkman 1984). It has been argued (Bandura ban`dur´a   

n. 1. A traditional Ukrainian stringed musical instrument shaped like a lute, having many strings.
 1986) that whether or not people will undertake particular actions, attempt to perform particular tasks, or meet certain goals depends on whether they believe that they will be successful in performing these actions. The stronger this perceived self-efficacy, the more one will exert effort and persist at a task (Fiske and Taylor 1991). Thus, along with having the literal resources (income) to demonstrate responsible financial management behavior, individuals must also feel that the information is important and relevant to them and will enable them to make a difference in the outcome.

H5: The relationship between income and responsible financial management behavior is mediated by external LOC.

The Role of Ethnicity

The working belief in the fields of financial services The examples and perspective in this article or section may not represent a worldwide view of the subject.
Please [ improve this article] or discuss the issue on the talk page.
 and social marketing is that there is a relationship between race and financial behavior. This belief is exemplified by the fact that many of the programs currently in place to address financial management behavior are targeted at subpopulations based on ethnicity, focusing primarily on minority (i.e., black and Hispanic) populations. While this relationship between ethnicity and financial behavior may exist, it is likely that these differences result not simply from racial or ethnic variations but from social, economic, and psychological factors such as the ones examined in the current research. While past research has shown mixed and inconclusive INCONCLUSIVE. What does not put an end to a thing. Inconclusive presumptions are those which may be overcome by opposing proof; for example, the law presumes that he who possesses personal property is the owner of it, but evidence is allowed to contradict this presumption, and show who is  findings regarding the correlation between race and LOC, some studies point to a correlation between the two such that minorities (particularly African Americans) are believed to be more likely than whites to report an external LOC (Porter and Washington 1979). However, the relationship between minority status and LOC is found to be complex and not as yet completely understood (Mickelson 1990). Ethnicity and income are correlated cor·re·late  
v. cor·re·lat·ed, cor·re·lat·ing, cor·re·lates

v.tr.
1. To put or bring into causal, complementary, parallel, or reciprocal relation.

2.
 such that incomes for African Americans and Hispanics in the United States Hispanics in the United States, or Hispanic Americans, are American citizens or residents of Hispanic ethnicity who identify themselves as having Hispanic Cultural heritage.[1] According to the 2000 Census, Hispanic Americans constitute roughly 12.  are significantly lower than that for whites (Aizcorbe, Kennickell, and Moore 2003). In addition, minority group members on average have fewer assets and less experience with financial markets and financial services. These correlations lead to the following three hypotheses regarding the role of ethnicity in the relationship between LOC, income, and knowledge and responsible financial management behavior:

H6: Race/ethnicity moderates the relationship between LOC and responsible financial management behavior.

H7: Race/ethnicity moderates the relationship between income and responsible financial management behavior.

H8: Race/ethnicity moderates the relationship between financial knowledge and responsible financial management behavior.

METHODOLOGY

We use data from the 1999 Freddie Mac Freddie Mac: see Federal Home Loan Mortgage Corporation.  Consumer Credit Survey to test our hypotheses. The purpose of the Consumer Credit Survey was to better understand consumer attitudes, behaviors, knowledge, and experiences with credit and financial management in order to find ways to help more consumers become homeowners. This survey collects detailed information on individual and household characteristics of consumers drawn from mail panels from two independent research firms. Approximately 23,000 surveys were mailed to individuals between 20 and 40 years of age with incomes below $75,000 per year since this segment represents the most likely pool of first-time homebuyers. The response rate was approximately 51%. The analysis reported here is based on 10,997 usable observations. The questions asked on the survey instrument were largely based upon earlier focus group findings, other surveys, and studies related to credit.

Because the sample in this data set was drawn from a voluntary consumer survey respondent In Equity practice, the party who answers a bill or other proceeding in equity. The party against whom an appeal or motion, an application for a court order, is instituted and who is required to answer in order to protect his or her interests.  pool, there may be certain biases due to nonresponse. In addition, these findings may not be generalizable gen·er·al·ize  
v. gen·er·al·ized, gen·er·al·iz·ing, gen·er·al·iz·es

v.tr.
1.
a. To reduce to a general form, class, or law.

b. To render indefinite or unspecific.

2.
 to individuals with moderate and high incomes because the sample was restricted to families with incomes at or below $75,000. This exclusion may disproportionately dis·pro·por·tion·ate  
adj.
Out of proportion, as in size, shape, or amount.



dispro·por
 affect white and Asian American A·sian A·mer·i·can also A·sian-A·mer·i·can  
n.
A U.S. citizen or resident of Asian descent. See Usage Note at Amerasian.



A
 respondents who have higher average incomes than African American African American Multiculture A person having origins in any of the black racial groups of Africa. See Race.  and Hispanic respondents.

The main explanatory ex·plan·a·to·ry  
adj.
Serving or intended to explain: an explanatory paragraph.



ex·plan
 constructs in our model of financial management behavior include LOC, financial knowledge, and income. We also include race or ethnic background as interactions between race/ethnicity and each of the main constructs.

Financial management behavior is a 5-item measure of the respondent's self-assessed ability to budget, save money, and control spending. These responsible financial behaviors include controlling spending, paying bills on time, planning for one's financial future, saving money, and providing for one's self and family. Scores on this scale are a summation summation n. the final argument of an attorney at the close of a trial in which he/she attempts to convince the judge and/or jury of the virtues of the client's case. (See: closing argument)  of the ratings on each of the five scale items ranging from 5 to 25. Higher scores correspond to higher levels of responsible financial behavior. These items, as well as those for other model constructs, are listed in Appendix 1. One limitation of this study is that reported financial behavior may not be equivalent to actual financial behavior.

External LOC is composed of the 7-item version of Rotter's LOC scale (Rotter 1975).

There are three distinct but related ways in which consumer knowledge is conceptualized and measured: objective knowledge, subjective knowledge, and experience (Flynn and Goldsmith 1999). Here our financial knowledge construct is a multiple-item scale that measures an individual's self-assessed ratings of knowledge about financial matters related to borrowing and investing. Scores on this scale are a summation of the ratings on each of the five scale items. This subjective measure of financial knowledge is significantly and positively correlated (r = .3570; p < .0001), with an objective measure of financial knowledge also collected in this questionnaire (Perry and Ards 2002).

Income is a self-reported measure of annual household income on a 9-point scale, ranging from less than $15,000 to over $100,000. We have used this to create a dummy variable This article is not about "dummy variables" as that term is usually understood in mathematics. See free variables and bound variables.

In regression analysis, a dummy variable
 coded 1 for incomes over $35,000 and zero otherwise.

Finally, race/ethnicity is captured by a series of binary variables for African American, Hispanic/Latino, Asian American, or white respondents. These categories are based on the 2000 Census definitions, although recategorized so that Hispanic or Latino individuals, regardless of their race, are included in the Hispanic/Latino category. Thus, members of the African American and white categories are non-Hispanic.

FINDINGS

Table 1 shows correlations between all constructs in the proposed model of financial management behavior. All variable pairs are significantly correlated at the 0.01 level due to the large sample size. Results of this correlation analysis show a negative relationship to exist between external LOC and financial knowledge, and a negative relationship between external LOC and responsible financial management behavior. This suggests that externals have less financial knowledge, and externals are less likely to engage in responsible financial behavior. We also find a positive relationship between income and responsible financial management behavior. That is, individuals with higher incomes are more likely to engage in responsible financial behaviors. The size of the correlation between external LOC and responsible financial management behavior is -0.0983, and the correlation between financial knowledge and responsible financial management behavior is 0.2760. These findings suggest that externals and people with lower levels of financial knowledge are less likely to engage in responsible financial management behaviors, while people with low incomes are more likely to engage in these behaviors. We test these relationships again in a regression model (reported in Table 2) that controls for the effects of other individual difference variables.

Table 1 also reports Cronbach's alpha Cronbach's (alpha) has an important use as a measure of the reliability of a psychometric instrument. It was first named as alpha by Cronbach (1951), as he had intended to continue with further instruments.  reliability estimates for each of the multiple-item scale in the model. In general, Cronbach's alpha coefficient coefficient /co·ef·fi·cient/ (ko?ah-fish´int)
1. an expression of the change or effect produced by variation in certain factors, or of the ratio between two different quantities.

2.
 measures the extent to which individual items that constitute a multiple-item scale correlate with one another or the total for all items in that measure. This coefficient is a widely used index of internal consistency In statistics and research, internal consistency is a measure based on the correlations between different items on the same test (or the same subscale on a larger test). It measures whether several items that propose to measure the same general construct produce similar scores.  or reliability of a scale. A coefficient alpha of 0.70 or higher is generally considered to be evidence of acceptable reliability (DeVellis 1991).

Table 2 shows the results of a multiple regression model in which responsible financial behavior is regressed on external LOC, financial knowledge, and income as well as dummy Sham; make-believe; pretended; imitation. Person who serves in place of another, or who serves until the proper person is named or available to take his place (e.g., dummy corporate directors; dummy owners of real estate).  variables for African American, Hispanic/ Latino, and Asian American persons. The omitted category in this regression comprises white respondents. This model also includes interactions between LOC, knowledge, a dummy for incomes greater than $35,000 per year, and each racial/ethnic dummy. The overall F value for this model is 202.55, which is significant at the 0.01 level, and the [R.sup.2] is 0.22. However, it is important to exercise caution when interpreting statistical significance in this study because of the large sample size.

Our findings support Hypotheses 1 through 3. According to H1, we should find a negative relationship between external LOC and financial management behavior. That is, externals will be less likely to engage in responsible financial management behavior. The coefficient on the external LOC variable is significant and negative, in support of ill, although the size of this standardized coefficient suggests that the effect of this variable is small. H2 proposed that individuals with higher levels of financial knowledge are more likely to engage in responsible financial management behavior. The coefficient on financial knowledge is significant and positive. Thus, H2 is supported. According to H3, there is a positive relationship between income and responsible financial management behavior. That is, people with higher incomes should be more likely to engage in responsible financial management behaviors. The coefficient on the income dummy variable is positive, which supports H3. Overall, these findings suggest that our proposed framework can be used to explain financial management behavior. However, financial knowledge has a larger direct effect on behavior than the other constructs. Knowledge has a standardized coefficient of 0.23, while the coefficient on the income dummy is only 0.14 and on LOC is -0.13.

H4 posits that LOC mediates the relationship between financial knowledge and responsible financial management behavior. Table 3 shows the results of a series of regression models used to conduct a Sobel test of mediation (Baron and Kenny 1986). We use this test to determine whether the relationship between knowledge and responsible financial management behavior is mediated by LOC. Thus, our independent variable is financial knowledge, the mediating variable is LOC, and the dependent variable is financial management behavior. First, the mediating variable is regressed on the independent variable (Model 1), the dependent variable is regressed on the independent variable (Model 2), the dependent variable is regressed on the mediator mediator n. a person who conducts mediation. A mediator is usually a lawyer, or retired judge, but can be a non-attorney specialist in the subject matter (like child custody) who tries to bring people and their disputes to early resolution through a conference.  (Model 3), and the dependent variable is regressed on both the mediator and the independent variable (Model 4). The equation for the Sobel test suggested in Baron and Kenny (1986) is as follows:

Z value = ab/SQRT([b.sup.2][s.sup.2.sub.a] + [a.sup.2][s.sup.2.sub.b])

where a = the coefficient of the regression of the independent variable on the mediator, [s.sub.a] = the standard error of a, b = the coefficient of the regression of the mediator and the independent variables on the dependent variable, and [s.sub.b] = the standard error of b. The coefficients on the independent variables in each of these models must be significant in order for mediation to occur. In addition, the coefficient on the independent variable is smaller when paired with the mediator than when it is the sole independent variable. Results of the Sobel test suggest that the indirect effect of knowledge on behavior via LOC is significantly different from zero (F = 21.65, p < .01). Thus, H4 is supported.

H5 proposes that LOC also mediates the relationship between income and financial management behavior. A similar mediation analysis is reported in Table 4. Here we test whether LOC mediates the relationship between income and financial management behavior. In this case, financial management behavior is the dependent variable and mediating variables remain the same. The independent variable is income. Following the procedure described above, the model results presented in Table 4 show that all coefficients are significant, and the coefficient on income is smaller when paired with LOC than it is otherwise. Results of the formal Sobel test suggest that the indirect effect of income on behavior via LOC is significantly different from zero (F = 19.706, p = .01). These findings support H5.

The moderating effects of race and ethnic background are shown in the regression presented in Table 2. These results must be interpreted with caution because much of the statistical significance is driven by the large sample size, and the coefficients are small.

Interestingly, Hispanic/Latino was the only significant dummy variable measuring direct effects of race or ethnicity. However, there is some evidence that race/ethnicity can moderate the effects of LOC, financial knowledge, and income on responsible financial management behavior. For example, the interaction of African American with external LOC is significant and positive, as was the interaction of Hispanic/Latino with external LOC. This was not the case for the Asian interaction with LOC. Thus, we find that African American and Hispanic/Latino externals are more likely to engage in financial management behaviors than their white counterparts. Thus, H6 is partially supported.

In terms of interactions between race/ethnicity and low income, the coefficient on the African American/income interaction was marginally significant (p = .0067) and negative, suggesting that African Americans with low incomes are more likely to engage in responsible financial management behavior than their low-income white counterparts. The Asian and Hispanic/Latino interactions were not significant. Thus, H7 is partially supported.

In terms of financial knowledge, only the Hispanic/Latino interaction with financial knowledge was significant. This suggests that Hispanics with higher levels of financial knowledge are more likely than knowledgeable whites to engage in responsible financial management behaviors. The African American and Asian interactions with knowledge were not significant, which means that the effects of knowledge on behavior for these groups are no different than they are for whites. These findings partially support H8.

Given these results, we can conclude that LOC mediates the effects of both financial knowledge and income on responsible financial management behavior. Evidence of race and ethnicity as moderators is mixed, as these findings suggest that the effects of financial knowledge, LOC, and income may differ for African American and to a lesser extent Hispanic and Asian consumers. It is important to note that despite evidence of statistical significance, the regression coefficients and thus the magnitude of the effects reported here are small.

CONCLUSIONS AND IMPLICATIONS

Our findings generally support the premise that consumers' propensity to save, budget, and control spending depends partly on their level of perceived control over outcomes as well as knowledge and financial resources. LOC appears to have a significant impact on responsible financial management behavior both directly and indirectly, although this impact is small in most cases. In particular, we find that an individual's LOC mediates the effects of financial knowledge and income on behavior. This suggests that individuals may not take full advantage of their knowledge or financial resources unless they feel that they control their own financial destiny. Although knowledge and income are important, those who believe that financial outcomes are due to chance or powerful others, i.e., externals, will be slightly less likely to take steps to take action; to move in a matter.

See also: Step
 to manage their finances.

It is difficult, however, to draw conclusions about the direction of causality causality, in philosophy, the relationship between cause and effect. A distinction is often made between a cause that produces something new (e.g., a moth from a caterpillar) and one that produces a change in an existing substance (e.g.  here, particularly in the relationship between self-assessed financial knowledge and reported financial behavior. For example, self-assessed financial knowledge and self-reported financial behavior may be similar in the minds of respondents.

These findings imply that financial management behavior may vary by race and ethnic background, and it also appears that LOC may have different effects for different groups. In particular, African American and Hispanic/ Latino externals were more likely to engage in responsible financial management behaviors than white or Asian externals, although these effects are small.

One possible explanation for these results could be differences in beliefs or expectations of unfair or discriminatory dis·crim·i·na·to·ry  
adj.
1. Marked by or showing prejudice; biased.

2. Making distinctions.



dis·crim
 treatment. Because of historical discrimination against disadvantaged minorities in employment and financial markets, members of these groups may be more sensitive to negative and unforeseen events. For example, black Americans are more likely to report discrimination in a wide range of important life domains including housing, education, and employment (Schmitt and Branscombe 2002; Sigelman and Welch Welch , William Henry 1850-1934.

American pathologist and bacteriologist who discovered the bacteria that causes gas gangrene.
 1991). These minorities, when externals, may be more likely than nonminorities to control their spending and save money in order to protect themselves against bad luck or powerful others.

Clearly there are substantial negative costs to consumers and to society when consumers lack financial knowledge. When consumers are misinformed or make financial decisions that result in loan defaults, for example, these costs increase interest rates for other consumers and can trigger losses for private investors as well as for the federal government. Consumers who fail to understand the credit rating system may engage in behaviors that have both immediate and long-term negative effects on their ability to obtain mortgage or business loans and on wealth accumulation in general. In recent years, a number of federal regulators and state government agencies as well as private lending institutions have devoted resources toward consumer financial literacy programs. These results provide empirical evidence that financial knowledge has a significant effect on financial outcomes, suggesting that devoting resources to consumer financial education may be worthwhile.

Several studies, including the one reported here, have found evidence of the relationship between individual differences and financial behavior. For example, this study finds that consumer knowledge and LOC significantly affect consumers' financial management behavior. What have yet to be explored are the antecedents of financial knowledge, and what are the most effective ways for consumers to acquire this knowledge. In addition, future research should explore underlying sources and influences that affect financially oriented values and beliefs, in an effort to understand how to better prepare consumers for responsible decision making.

APPENDIX
Consumer Credit Survey Variables

Responsible Financial Behavior

How do you grade yourself in the following areas?

                               Poor   Fair   Okay   Good   Excellent

a. Controlling my spending     []     []     []     []     []
b. Paying my bills on time     []     []     []     []     []
c. Planning for my financial
    future                     []     []     []     []     []
d. Providing for myself and
    my family                  []     []     []     []     []
e. Saving money                []     []     []     []     []

Locus-of-Control

How often do you feel ...?

                          Almost                                Almost
                          Never    seldom   sometimes   often   always

a. There is really
    no way I can solve
    some of my problems   []       []       []          []      []
b. I am being pushed
    around in life        []       []       []          []      []
c. There is little I
    can do to change
    the important
    things in my life     []       []       []          []      []
d. I can do anything
    I set my mind to      []       []       []          []      []
e. What happens to me
    in the future
    depends on me         []       []       []          []      []
f. Helpless in dealing
    with the problems
    of life               []       []       []          []      []
g. I have little
    control over the
    things that
    happen to me          []       []       []          []      []

Financial Knowledge

How much do you know about the following?

                        Very                      A fair
                        Nothing   little   Some   amount   A lot

a. Interest rates,
    finance charges,
    and credit terms    []        []       []     []       []
b. Credit ratings and
    credit files        []        []       []     []       []
c. Managing finances    []        []       []     []       []
d. Investing money      []        []       []     []       []
e. What is on your
    credit report       []        []       []     []       []

Income

* What is your (and your spouse's combined) total before-tax income?
Please consider income from all sources, including work, alimony,
child support, rental income, investment income and any other money
you may receive. (MARK ONE ANSWER ONLY)

[] Under $15,000        [] $15,000 to $24,999    [] $25,000 to $34,999
[] $35,000 to $44,999   [] $45,000 to $54,999    [] $55,000 to $64,999
[] $65,000 to $74,999   [] $75,000 to $100,000   [] Over $100,000


REFERENCES

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Data were provided by the Freddie Mac Consumer Credit Survey. The views expressed in this paper are those of the authors and do not necessarily reflect those of Freddie Mac, its management, shareholders, or board of directors.
TABLE 1
Means, Standard Deviations, Reliabilities, and Correlations

                           Standard    Cronbach's
Construct          Mean    Deviation     Alpha

Financial          16.05     5.45        0.8281
  management
  behavior
External LOC        9.72     6.61        0.8653
Financial          15.42     7.40        0.9101
  knowledge
Income > $35,000    0.51     0.50          --

                   Pearson Correlation Coefficients (n = 11,862)

                   Financial
                   Management    External     Financial
Construct           Behavior        LOC       Knowledge   Income

Financial            1
  management
  behavior
External LOC        -0.0983       1
Financial            0.2760      -0.0311        1
  knowledge
Income > $35,000     0.1926      -0.1253        0.1837      1

Note: All correlation coefficients are significant at p G .01 level.

TABLE 2
Regression Model of Responsible Financial Management Behavior

                                      Parameter   Standard
Variable                              Estimate     Error     T Value

Intercept                             13.64788     0.24243    56.3
External LOC                          -0.1115      0.01299    -8.58
Financial knowledge                    0.17097     0.01052    16.26
Income over $35,000                    1.52942     0.15712     9.73
African American                      -0.75458     0.32093    -2.35
Asian American                         1.32035     0.63045     2.09
Latino/Hispanic                       -1.50415     0.40098    -3.75
African American x external LOC        0.08648     0.01683     5.14
Latino x external LOC                  0.06049     0.02143     2.82
Asian x external LOC                  -0.02891     0.03397    -0.85
African American x income >$35,000    -0.64577     0.23797    -2.71
Latino x income >$35,000              -0.06859     0.26824    -0.26
Asian x income >$35,000                0.59421     0.34926     1.70
African American x knowledge           0.00235     0.01503     0.16
Latino x knowledge                     0.06296     0.01907     3.3
Asian x knowledge                     -0.01409     0.02497    -0.56

                                                 Standardized
Variable                              Pr > |t|     Estimate

Intercept                             <0.0001       0
External LOC                          <0.0001      -0.13506
Financial knowledge                   <0.0001       0.23203
Income over $35,000                   <0.0001       0.14016
African American                       0.0187      -0.06375
Asian American                         0.0363       0.07404
Latino/Hispanic                        0.0002      -0.11109
African American x external LOC       <0.0001       0.09763
Latino x external LOC                  0.0048       0.05311
Asian x external LOC                   0.3947      -0.01828
African American x income >$35,000     0.0067      -0.039
Latino x income >$35,000               0.7982      -0.00379
Asian x income >$35,000                0.0889       0.02739
African American x knowledge           0.8759       0.00356
Latino x knowledge                     0.001        0.07807
Asian x knowledge                      0.5726      -0.01409

Note: Overall F = 99.83; P = .0001; [R.sup.2] = 0.1122;
adjusted [R.sup.2] = 0.1111; N = 11,862.

TABLE 3
Regression Analysis of Financial Behavior as a Function of Knowledge
and Control

          Independent Variables   Dependent Variables   Coefficients

Model 1   Knowledge               LOC                      -0.3849
Model 2   Knowledge               Financial behavior        0.3927
Model 3   LOC                     Financial behavior       -0.2907
Model 4   Knowledge               Financial behavior        0.3215
          LOC                                              -0.2053

Note: All coefficients are significant at p < .0001 level.

TABLE 4
Regression Analysis of Financial Behavior as a Function of
Income and Control

          Independent Variables   Dependent Variables   Coefficients

Model 1   Over 35                 LOC                      -1.6556
Model 2   Over 35                 Financial behavior        2.1013
Model 3   LOC                     Financial behavior       -0.0811
Model 4   Over 35                 Financial behavior        1.9984
          LOC                                              -0.0622

Note: All coefficients are significant at p < .0001 level.
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Date:Dec 22, 2005
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