An item response theory approach to constructing and evaluating brief and in-depth financial literacy scales

Abstract

We applied item response theory (IRT) to construct and evaluate new brief and in-depth financial literacy scales. A survey of a UK adult sample (N = 589) included 50 questions to assess knowledge about managing financial resources and competence in using personal finance-related information—including five widely used items, on interest rates, inflation, investment diversification, mortgages and bonds. IRT applied to a scale of these items identified some limitations, overcome via further iterations to construct a new brief scale with sound psychometric properties. IRT was then applied iteratively to our pool, resulting in an in-depth, 20-item scale, also psychometrically sound, covering four broad financial domains: everyday money transactions; the concept of money; borrowing; and saving and investment. Parallel 10-item sub-scales were also evaluated. The validity of the new scales was demonstrated by regression analyses which found that, controlling for demographic variables, financial literacy predicted key indicators of financial well-being.