ECONOMIC LITERACY: DOES IT MATTER FOR OVERINDEBTEDNESS?

C. Varum, J. Costa, A. Kolyban

University of Aveiro (PORTUGAL)
At present, the financial market is facing severe constraints arising by household bankruptcy, mortgage debtor defaults and over-indebtedness. It is a common belief that improving economic (and financial in specific) literacy will improve the awareness of individuals about complex issues surrounding them and their ability to take decisions that directly affect their wealth. In this context, and in wider terms, it is argued that higher general awareness about financial issues could have helped to avoid crisis. In recent decades, several changes in the financial and productive systems, in technology, and regarding social and cultural aspects, generated an increasingly economic, financial and sociopolitical environment. Individuals interact in this context, and, more than in the past, have to take complex decisions, with implications for themselves and their families. Not surprisingly, it has been increasingly recognized that under such a complex environment it is extremely important to raise the general level of knowledge of the population in economics.

Along these lines, knowledge in economics latus sensu, that is encompassing also financial aspects, has been receiving increasing attention, in the practitioner and academic literature. The lack of basic knowledge about the functioning of markets may have detrimental consequences, in particular higher exposure to credit ad financial risk. In spite of these wider developments, the importance of economic literacy to wealth has been scarcely explored in empirical terms. This paper contributes to this line of research. Our purpose is to empirically demonstrate the influence of economic literacy in the financial decision making process, and, consequently, in the ability to meet the contracts and for wealth. We analyse the Portuguese case, a country about which there is scant empirical evidence on these matters, and use an original database built under Economicando project. We assess how much knowledge individuals have with respect to economics lato sensu (i.e. including aspects of financial literacy) for which we designed and fielded a new survey focused specifically on economic literacy, including a component of financial literacy. We seek to understand the relationship between economic literacy, over-indebtedness and wealth.