The impact of financial literacy in the decision of buying insurance

Text: Francisco Pitthan and Kristof De Witte, Leuven Economics of Education Research, KU Leuven

Photo credit: Tumisu from Pixabay

We are making decisions about the future on a daily basis. For example, about a new scooter we would like to buy, or about how much we should save. To make quicker decisions, we make simplifications about the reality and to what we expect for the future. Using instinctive mechanisms of our brains, we search for heuristics, “rules of thumb” or thought processes that usually feel automatic, that we do not even realize.

Behavioural biases affect us

Those short-cuts used by our brain lead us to be affected by behavioural biases, letting us blind for cognitive problems in our thought process, which can make us do poor decisions. Financial decisions, such as the decision to buy a certain type of insurance, can be particularly affected by behavioural biases, leading many times to lower financial well-being of individuals. Our current on going research at KU Leuven in Belgium aims to understand the behaviour of individuals to buying insurance, and how it can be changed.

One concept that can help us to understand the existence of biases in the decision-making of individuals is financial literacy, which can be defined as “a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well‐being” (OECD/INFE, 2011). The effect of financial illiteracy has been linked to poorer investment decisions, greater chance of falling in financial fraud schemes, lower financial management skills, lower participation in financial markets and lower commitment to retirement planning (Lusardi and Mitchell, 2014).

Participate in the survey!

Considering that most behavioural biases can be motivated either by a lack of a proper understanding or by an inability to apply their financial knowledge into welfare optimal attitudes and behaviours, the improvement of one’s financial literacy can also be a possibility to reduce the well-being reducing impact of behavioural biases in people’s insurance decision-making. This is what we propose to analyse in the present survey: how the decision of buying insurance against loss of income can be changed. By participating in this survey, you not only contribute to important new evidence for the fields of behavioural economics and financial literacy, but can also participate in a chance of winning a Netflix subscription (5 subscriptions will be raffled among the participants of the survey).

Link for the survey: http://tiny.cc/7s01qz

References

Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal  of economic literature, 52(1), 5–44.

OECD/INFE. (2011). Measuring financial literacy:  Questionnaire and guidance notes for conducting an internationally comparable  survey of financial literacy.

Authors  would like to thank the funding from Baloise Insurance Research Chair of  Financial Well-Being.