Does Financial Knowledge Change How We Make Decisions?

Everyday financial decisions can shape the economic well-being of millions of households. For years, financial education has been promoted as a key tool to improve these decisions. However, the COVID-19 pandemic put this premise to the test in a context of high uncertainty, income loss, and institutional fragility—especially in Latin America.

Does financial knowledge really translate into better decisions? What happens when people believe they have a certain level of knowledge but actually have another? Did anything change during the pandemic? The article “Financial knowledge and financial behavior: evidence from five Latin American countries before and during the COVID-19 pandemic” (International Journal of Bank Marketing, 2025), coauthored with Juan Sandoval (University of Georgia), María Antonieta Collazos, and Julio Sarmiento Sabogal (Pontificia Universidad Javeriana), helps answer these questions with greater precision. Drawing on evidence from Argentina, Colombia, Ecuador, Mexico, and Peru, the study offers relevant lessons for advancing financial education in the region.

What do we mean by financial knowledge?

When examined more closely, financial knowledge reveals different layers that help explain why people do not always make the best decisions. The specialized literature distinguishes between objective and subjective financial knowledge. The former refers to understanding basic concepts—such as inflation, interest rates, or risk diversification—and is typically measured through technical questions; the latter refers to individuals’ perceptions of their own level of financial knowledge, that is, how competent they believe they are at making economic decisions.

Although related, these concepts are not equivalent. In fact, our study shows that the correlation between these two measures is low. In other words, those who know more do not always perceive themselves as more capable, and those who feel confident do not necessarily master basic financial concepts. While objective knowledge reflects technical skills, subjective knowledge captures confidence, self-efficacy, and willingness to act. Understanding this distinction is essential to analyzing how people make financial decisions in practice.
The pandemic as a financial stress test

COVID-19 represented an unprecedented shock for households in Latin America. Job losses, reduced incomes, mobility restrictions, and uneven coverage of public support abruptly altered the conditions under which financial decisions were made. Seemingly simple decisions—such as comparing a loan or adjusting monthly spending—took on new complexity.

From an analytical perspective, the pandemic was a stress test for financial knowledge. If such knowledge truly helps people make better decisions, its effects should become more visible during times of crisis. Our study examines precisely this point by comparing financial behavior before and during the pandemic across five countries with different institutional realities but shared structural challenges.

Comparing before deciding

Comparing financial products—across banks and institutions—is one of the most basic yet most consequential practices for financial well-being. Comparison helps reduce costs, avoid unsuitable products, and make more informed decisions.

Before the pandemic, the effect of financial knowledge on this practice was uneven. In some countries, such as Colombia and Mexico, individuals with higher objective financial knowledge were more likely to compare products. During the pandemic, the picture changed. In nearly all countries analyzed, individuals with higher financial knowledge—especially subjective—showed a greater propensity to compare financial products. Uncertainty and budgetary pressure appeared to break passive behaviors and encourage more cautious decision-making. Confidence in one’s own knowledge played a key role: feeling capable of evaluating options facilitated action.

Seeking financial advice or deciding alone?

Seeking financial advice is one of the most debated behaviors: do people with greater financial knowledge seek more advice because they know how to use it better, or less because they trust their own judgment? The results reveal a clear distinction between objective and subjective knowledge. Those who objectively master technical concepts tend to rely less on external support, while individuals who feel more confident in their knowledge (subjective) are also more likely to seek advice—possibly because they know when they need it and how to use it.

During the pandemic, this relationship became more nuanced. In several countries, even individuals with high objective knowledge showed a greater willingness to seek advice, reflecting a more cautious stance in the face of uncertainty. However, cross-country differences were notable, pointing to the role of factors such as trust in financial institutions, access to quality services, and the degree of financial inclusion.

Spending more than one earns

One of the clearest signs of financial fragility is spending beyond one’s income. Our study confirms that both objective and subjective financial knowledge are associated with a lower likelihood of engaging in this behavior, albeit with different caveats.

Before the pandemic, overconfidence was observed in some countries: individuals who perceived themselves as competent did not necessarily adjust their behavior accordingly. During the pandemic, however, perception and action aligned more closely, encouraging greater spending control among those who felt capable of managing their finances. This finding reinforces a central idea: knowledge alone is not enough. The ability to translate knowledge into concrete decisions depends largely on the confidence to act.

Differences across countries

Our study shows that there is no universal relationship between financial knowledge and behavior. The same level of knowledge can produce different effects depending on the country, the moment, and the institutional context. Factors such as financial inclusion, regulation, macroeconomic stability, trust in institutions, and historical experience with the financial system play a decisive role.

Countries with more reliable and accessible financial systems tend to show a clearer link between knowledge and prudent decisions. In more fragile contexts, knowledge may not translate into action—or may even generate counterproductive effects if accompanied by overconfidence. These differences help explain why financial education strategies that work in one country do not necessarily yield the same results in another.

The results of this study offer several important lessons for advancing financial knowledge:

1. Financial education remains relevant, but it should not be limited to transmitting technical concepts: Strengthening objective knowledge is necessary but insufficient if it is not accompanied by strategies that build informed confidence and capacity for action (subjective knowledge).
2. Subjective knowledge matters, but it must be aligned with actual knowledge to avoid risks associated with overconfidence: Programs that only increase perceived competence without a solid knowledge base may lead to inefficient decisions.
3. Interventions must be context-sensitive: Financial education policies should be tailored to each country’s institutional, cultural, and economic realities and consider how decision-making changes in times of crisis.

Does financial knowledge change how we make decisions? The evidence suggests yes—but not automatically or uniformly. Financial knowledge influences product comparison, advice-seeking, and spending control, but its impact depends on perception, context, and country. The pandemic showed that in moments of crisis, individuals with greater knowledge—and, above all, greater informed confidence—tend to act more cautiously.

For Latin America, the challenge is not only to teach finance, but to understand how people think, trust, and decide under uncertainty. Advancing in this direction is key to building more resilient households and more inclusive financial systems.