The Arrested Deployment Model of Financial Literacy

Abstract

Findings concerning the circumstances in which financial literacy training is effective seem inconsistent. This chapter aims at bringing order to this vexing situation. Its central thesis is that people’s aptitude to deploy their financial literacy relies on their ability to use cognitive and mental resources. This depends on various factors, some endogenous (i.e., personality and cognitive traits such as intelligence and quality of self-control and executive functions) and some external. Among the external ones, we examine economic circumstances and the features of the financial task itself. Predictions from the model include that certain financial tasks, which are relatively simple and deliver prompt results, benefit from financial literacy training, whereas others, with less clear payoffs and only in a distant future, do not. People in straightened economic circumstances who experience scarcity have fewer resources and do not deploy what financial insights they acquired. Our predictions were all borne out by a study on an extensive program of financial training.