Validating Financial Knowledge Scale Using Item Response Theory

Abstract

It is important to have knowledge about financial products and services to make rational financial decisions. Financial knowledge is a wider term and hence difficult to measure. The previous studies have used various methods and instruments to measure it. But there is a need of comprehensive and validated instrument to measure the financial knowledge. In this study, an attempt has been made to measure financial knowledge using a scale consisting of multiple-choice questions on basic and specific financial knowledge related with banking products and services. Each correct answer has been scored ‘1’ and each wrong answer has been scored ‘0’. This dichotomous scale has been validated using Item Response Theory. The theory focuses on the appropriateness of the questions (items) included in the scale with respect to difficulty and discriminability. The results reveal that the overall instrument fulfils both the criteria. The test consisting of twenty-two items is reliable as well as valid with the discrimination index having all positive values ranging from 0.23 to 1.96 and the difficulty index ranging from –5.66 to 0.90. The purpose of this article is to encourage the usage of validated scales for the measurement of financial knowledge and discourage the perplexity in the field of financial knowledge and financial literacy.