Financial Literacy and Consumer Financial Fraud Prevention

Financial fraud has a non-negligible negative impact on households, society and financial markets. Therefore, it is important to study the factors that influence residents to become potential victims of financial fraud. Using data from China Family Panel Studies (CFPS), this paper empirically examines the relationship between residents' financial literacy and their possibility of becoming victims of potential frauds. Results show that residents with higher levels of financial literacy were less likely to be victims of potential fraudulent projects than those with lower levels of financial literacy. Specifically, a one-standard-deviation increase in financial literacy is associated with 9.9% decrease in the probability of residents becoming victims of a potential fraudulent project, and this effect also holds in those with lower levels of assets. Further tests show that this effect is more pronounced in people who use internets. These results sheds light on the understanding of financial knowledge's role in preventing the risk of financial fraud.