The development of a complementary financial capability index : a thesis presented in partial fulfilment of the requirements for the degree of Doctorate of Philosophy in Finance at Massey University, Manawatu, New Zealand
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Date
2024-06-11
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Massey University
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Abstract
Achieving behaviour change only through improved financial knowledge levels is difficult when taking into account other factors which influence an individual’s decision-making such as psychological factors, financial attitudes, and socio-demographic influencers. A deeper understanding of the relationship between psychological factors and financial capability levels provides educators and policymakers valuable insights to generate progression. Psychological biases are often innate, meaning individuals are usually not aware of the influence they may have on financial decisions. Education programmes which educate individuals on psychological influences as well as improving financial knowledge may collectively generate confidence and self-efficacy in one’s decision-making abilities. Therefore, a better understanding of financial decision-making is a critical investment in the social capital of society both today and in the future.
Financial capability is an important behavioural element which contributes to the development of financial wellbeing at the individual and household level, as well as improving economic stability. Consequently, financial capability remains high on the priority list for governments seeking to improve retirement wellbeing and reduce reliance on debt funding and government funded benefits, thereby improving financial stability.
This research seeks to investigate the influence of psychological factors on financial decision-making, providing findings which confirm the relationship between psychological factors and financial capability levels. Within a New Zealand context, this thesis proposes a complementary financial capability index developed in support of the financial wellbeing conceptual model developed by Kempson and Poppe (2018) and to further strengthen existing behavioural finance models. The complementary financial capability index is developed using data from the Australia and New Zealand Banking Group, and particularly focuses on incorporating measures of time orientation, self-control, locus of control, impulsivity, social status, and action orientation. Results of this study confirm the statistical significance of psychological factors independent of financial behaviour when measuring financial capability levels. The robustness of the proposed complementary financial capability index is tested on two different datasets under variable conditions. Significant results in both applications highlight the sensitivity of the index to changes in data inputs, while also confirming the ability of the model to produce financial capability scores despite changes in data inputs. To further investigate the relationship between psychological factors and financial decision-making and to understand the factors which influence financial behaviour in practice, a mixed methods study was undertaken on fourteen participants. The collection of survey data enables further applicability testing of the complementary financial capability index while thematic analysis of the one-on-one interview transcripts results in six key behavioural finance themes which further support the research objectives addressed in this thesis and provides valuable practical insights supporting existing behavioural finance literature.
This investigation confirms the significance of psychological factors on financial capability levels, over and above what may be captured by traditional factors such as financial knowledge and financial behaviour. The findings of this thesis inform policymakers and education providers on the elements of the financial decision-making process that can be targeted to generate progression in the financial capability levels and consequent financial wellbeing of New Zealanders.
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Financial literacy, New Zealand, Evaluation, Retirement income, Planning, Retirees, Finance, Personal, Decision making, Psychological aspects, behavioural finance, financial capability, financial decision-making