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Introduction
Consumers make various financial decisions on a regular basis. Every exchange or purchase decision entails a financial aspect which may include evaluating affordability and comparing the associated costs among alternative choices. For example, shopping for an automobile includes a decision on the brand and model, new or used car, and leasing compared to purchasing. It also entails different financing options such as the interest rates, fees, terms, and the payments. The more financially savvy customers may also consider expenses associated with maintenance, repairs, and fuel in addition to the future resale value of the car. These decisions significantly affect the total cost of car ownership. However, consumers often make poor financial decisions that jeopardize the financial well-being of themselves and their families. Many consumers do not save enough for retirement and consumer and student debt has reached unprecedented levels (Mitchell and Lusardi, 2015; Morrin et al., 2012; US Courts, 2016; Wolff-Mann, 2016).
This study focuses on consumer financial literacy as a critical factor that influences consumers’ financial decisions. Financial literacy is the fundamental knowledge and skills that capture one’s ability to make informed and effective personal financial and economic decisions by understanding how money works (Lusardi and Mitchell, 2007; Starček and Trunk, 2013). Previous research has differentiated between objective financial literacy (what one actually knows, hereafter referred to as OFL) and subjective financial literacy – one’s perceptions of his/her own financial literacy, hereafter referred to as SFL. The degree to which consumers believe that they are able to make the right financial decision influences their financial decisions and their perceptions of the relevant risks. So, SFL determines consumers’ approaches to making personal financial decisions. OFL, however, affects the outcome of one’s financial decisions. Financially literate consumers are expected to make better personal financial decisions. Those with higher levels of OFL are less likely to engage in risky investments while those with higher SFL are more susceptible to such investments (Hadar et al., 2013).
OFL and SFL should also lead to different behaviors including giving advice to others and the use of financial services. Individuals often influence each other’s decisions in various financial matters. Opinion leadership and one’s knowledge and expertise are two different individual attributes, even though the two are often correlated...