Microsoft Word Ed Horwitz Post Dissertation Fina docx

 Independent Variables  
 Objective Financial Knowledge 
 
Financial knowledge is represented in the framework as a subcomponent of financial 
literacy (Figure 4.1). Financial knowledge measures in the data set were chosen from scales 
established by Lusardi and Mitchell (2007a, 2007b, 2007c, 2009, 2011). A total of five objective 

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questions were used to assess financial knowledge and were referred to as compound interest, 
inflation, bond pricing, mortgages, and diversification. The compound interest, inflation, and 
diversification questions were developed for the 2004 HRS, and the mortgages question was 
subsequently added to the ALP survey. Three multiple-choice answers were provided along with 
don’t know and refuse to answer. A scale was created to capture correct answers to the five 
questions, resulting in a variable range from 0 to 5. This composite measure for objective 
financial knowledge has been historically used for research on best practice behaviors that has 
also utilized the NCFS dataset (Robb & Woodyard, 2011, Seay & Robb, 2013). The mean 
objective financial knowledge score was 3.48 with a standard deviation of 1.26. Reliability 
analysis indicated a Cronbach’s coefficient alpha of .600 for this measure. The strength of the 
Cronbach’s alpha coefficient is considered questionable, although this composite measure has 
been used in prior literature utilizing the NFCS data, and the questions have been used 
extensively in prior financial education and literacy research (Lusardi & Mitchell, 2007a, 2007b, 
2007c, 2009, 2011; Lusardi 2008; Lusardi, Mitchell, & Curto, 2010; Allgood, & Walstad, 2012; 
Robb & Woodyard, 2011; Seay & Robb, 2013). The survey questions were as follows: 
1.  Compound Interest: Suppose you had $100 in a savings account and the interest 
rate was 2% per year. After 5 years, how much do you think you would have in 
the account if you left the money to grow?  
2.  Inflation: Imagine that the interest rate on your savings account was 1% per year, 
and inflation was 2% per year. After 1 year, how much would you be able to buy 
with the money in this account? 
3.  Bond Pricing: If interest rates rise, what will typically happen to bond prices? 

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4.  Mortgages: A 15-year mortgage typically requires higher monthly payments than 
a 30-year mortgage, but the total interest paid over the life of the loan will be 
less. 
5.  Diversification: Buying a single company’s stock usually provides a safer return 
than a stock mutual fund.