A financial sophistication proxy for the Survey of Consumer Finances

The Survey of Consumer Finances (SCF) contains detailed US household balance sheet information and is frequently used to study outcomes in household finance. There is no variable that explicitly measures financial sophistication in the SCF. We propose a factor score composed of four questions that can serve as a proxy of financial sophistication to correct a possible important omitted variable bias. The results using the sophistication factor show how controlling for financial sophistication provides a more precise estimate of the marginal effects of control variables such as education and race.