Towards more sustainable debt attitudes and behaviors: The importance of basic economic skills

Goedde-Menke M, Erner C, Oberste M

Abstract

This research builds on the idea that debt-related financial distress faced by an individual results primarily from the inability to understand and apply fundamental economic concepts to debt decisions rather than from a lack of highly specific financial knowledge. This notion offers a potential explanation for why current financial literacy programs, which generally focus on the latter aspect, are considered to be mostly ineffective. We hypothesize that the understanding of fundamental economic concepts plays an essential role in explaining debt attitudes and behaviors. To test this hypothesis, we empirically examine how basic economic skills relate to these traits among German adolescents while controlling for their levels of financial literacy. Our results indicate that basic economic skills beneficially relate to both individual debt attitudes and behaviors. In contrast, we do not find a significant impact of financial literacy. Therefore, a stronger consideration of fundamental economic concepts in financial literacy programs might be a fruitfulway to increase their effectiveness.