Knowledgeable consumers who make informed choices are essential to an effective and efficient marketplace. In classical economics, informed consumers provide the checks and balances that keep unscrupulous sellers out of the market. For instance, consumers who know the full range of mortgage interest rates and terms in the marketplace, who understand how their credit-risk profile and personal situation fit with those rates and terms, and, consequently, who can determine which mortgage is best for them make it difficult for unfair or deceptive lenders to gain a foothold in the marketplace. | Household Financial Management: The Connection between Knowledge and Behavior Marianne A. Hilgert and Jeanne M. Hogarth, of the Many of these programs focus on pro- Board’s Division of Consumer and Community viding information to consumers and operate under Affairs, and Sondra G. Beverly, of the University of the implicit assumption that increases in information Kansas, prepared this article. and knowledge will lead to changes in financial- management practices and behaviors. Whether that is Across the decade of the 1990s to the present, the the case is the province of behavioral economics, issue of financial education has risen on the agendas which offers its blend of psychological and economic of educators, community groups, businesses, govern- insights into household financial management. ment agencies, and This increased Behavioral economics acknowledges the role that interest in financial education has been prompted by psychological characteristics (such as procrastina- the increasing complexity of financial products and tion, regret, risk aversion, compulsiveness, generos- the increasing responsibility on the part of individu- ity, altruism, and peer pressure) play in household als for their own financial security. Well-informed, economic decisions. Thus, behavioral economics financially educated consumers are better able to offers a framework for studying behaviors that seem make good decisions for their families and thus are inconsistent or irrational—for example, consumers in a position to increase their economic security and who hold money in a savings account earning interest well-being. Financially secure families are better able at 2 percent while carrying balances on credit cards to contribute to vital, thriving communities and and paying 18 percent thereby further foster community economic develop- This article explores the connection between ment. Thus, financial education is important not only knowledge and .
