Exploring Determinants of Desirable Financial Behaviors using Decision Tree Analysis Evidence from four waves of National Financial Capability Study

Written By: Don Lux and Laura Kauzlarich

The purpose of this paper is to utilize decision tree (DT) analysis to examine the relationship between income level, financial satisfaction, financial confidence, financial knowledge, and several demographics with a goal of better understanding desirable financial behavior. The emphasis of this analysis is focused particularly upon better understanding the role of financial knowledge in desirable behavior outcomes. DT analysis is most useful when an analysis includes numerous variables and solving problems where the cumulative learning process is inherent. Our DT analysis of four FINRA National Financial Capability datasets (2009, 2012, 2015, and 2018) suggest that financial knowledge is a relevant variable only under specific circumstances and for respondents with relatively higher income levels. Key variables in the DT analysis included income level and financial satisfaction.