RELM.

Rethinking Financial Literacy Through Behavioural Science

Financial literacy has been a central focus of policy and education for decades. The dominant narrative is something along the lines of: if individuals are given the right information – about budgeting, saving, debt or investing – then they will make better financial decisions. Schools, banks, nonprofits and governments invest in financial education programmes around the world with this assumption. Yet, growing research shows that while financial literacy succeeds at improving knowledge, those gains do not always translate into positive, sustained financial behaviour. 

This raises an important question: Why does financial knowledge not consistently lead to better financial decisions? – why does improved knowledge not guarantee better choices?

This article introduces a practical lens for understanding this challenge and explains why a solely informational approach is insufficient. We also explore how behavioural science can help to bridge the gap between knowledge and action.

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What We Mean by Financial Literacy 

The term “Financial Literacy” generally refers to an individual’s ability to understand and use various financial skills, this includes but is not limited to budgeting, saving, debt management and investing. It encompasses financial knowledge, behaviours and attitudes. Research across OECD countries shows that financial literacy and behaviour are linked – more literate individuals tend to exhibit more positive financial actions (Vaahtoniemi et al., 2023)

On the other hand, meta analyses suggest that even well-designed education programmes often have limited impact on actual decision-making behaviours. For example, controlled trails in schools found that improving knowledge does not necessarily lead to long-term behavioural improvements unless interventions explicitly address underlying behavioural biases and decision contexts (ScienceDirect, 2025).

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Even dominant narratives have limitations…

The conventional belief in financial literacy assumes a linear model:
More knowledge → Better choices → Better outcomes 

Intuitively, this model is appealing. It draws on the idea that poor decisions are driven by lack of understanding or awareness. In many policy circles, the remedy is curricula, information campaigns or more workshops. 

However, evidence challenges the strength of this assumption. Quasi-experimental data from the UK, suggests that broader education reforms have only modest effects on financial behaviours – a reminder that formal education alone is not a panacea for behavioural change (ScienceDirect, 2021). 

Alongside this systematic reviews indicate that while financial education can improve knowledge and even some behaviours, the scale and sustainability of these effects vary widely across contexts and groups (FinCap, 2025). 

With this in mind, the interpretation of these findings are not a argument against financial literacy – but rather an indication that knowledge is critical but not sufficient for behaviour change.

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What behavioural science brings to the table 

If financial literacy is more than just information; then we need frameworks that explain how humans make decisions in the real world. Behavioural science – drawing on psychology and economics – recognises that humans are boundedly rational:
“We are influenced by biases, heuristics (mental short cuts), social context and emotional states. In many decisions, we rely on automatic or habitual processes rather than purely rational calculation” (ScienceDirect, 2025).

For instance, people often overestimate their ability to make optimal decisions (overconfidence bias) or discount the future too steeply (present bias), undermining long-term financial goals. Behavioural research also highlights that context matters: the way choices are presented, defaults, timing and social cues can all powerfully shape behaviour.

International organisations have taken note. The Organisation for Economic Co-operation and Development (OECD) has documented how behavioural insights can enhance financial literacy and investor education programmes by improving design to align with real decision processes (OECD, 2018).

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So what can we do?

These findings set the stage for more nuanced approaches to financial capability. Rather than only asking what people know, we should also ask:
– how do cognitive biases influence how people interpret financial information?

– What features of financial products or systems make rational choices harder?

– How do emotionally charged moments affect decision quality?
– What behavioural tools can be introduced to help individuals act on the knowledge they have?

This is where applied behavioural science becomes indispensable – not as a replacement for financial literacy, but as an accompaniment that aids in translating knowledge into action.

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A Path Forward 

Financial literacy remains an integral foundation for economic-wellbeing. However, scholarship and practice both suggest that information alone cannot guarantee better decisions. 

To truly improve financial outcomes, we must:

1. Appreciate how humans actually make choices 
2. Integrate behavioural insights into programme and policy design 
3. Focus on designing environments where good decisions are easy, intuitive and supported.

Next time, we explore how this insight plays out in the UK context and how collaborative research and behavioural design can help organisations build more effective financial capability strategies.

Appendix:

• FinCap. (2025). Financial education affects knowledge and behaviour. https://www.fincap.org.uk/en/reviews/financial-education-affects-knowledge-and-behaviour
• Organisation for Economic Co-operation and Development. (2018). The application of behavioural insights to financial literacy and investor education programmes and initiatives. OECD Publishing. https://doi.org/10.1787/0b5f985d-en
• ScienceDirect. (2025). How learning about behavioural biases can improve financial literacy? International Review of Economics and Finance, 99, 103989.
• ScienceDirect. (2021). Does education improve financial behaviours? Quasi-experimental evidence from Britain. Journal of Economic Behavior & Organization, 183, 481-507.
• Vaahtoniemi, S., Buturak, G., Kalmi, P., & Ruuskanen, O.-P. (2023). Financial literacy, financial knowledge, and financial behaviors in OECD countries. Journal of Risk and Financial Management, 18(3), 167.