How financially literate are women? An overview and new insights
Tabea Bucher-Koenen, Annamaria Lusardi, Rob J. M. Alessie, and Maarten C. J. van Rooij
Forthcoming in the Journal of Consumer Affairs
Abstract: We document strikingly similar gender differences in financial literacy across countries. When asked to answer questions that measure knowledge of basic financial concepts, women are less likely than men to answer correctly and more likely to indicate that they do not know the answer. In addition, women give themselves lower scores on financial literacy self-assessments than men. Both young and old women show low levels of financial literacy. Moreover, women for whom financial knowledge is likely to be very important—for example widows or single women—also know little about concepts relevant for day-to-day financial decisions. Even women in favorable economic conditions are less financially knowledgeable than men. The gender differences are present for very basic as well as more advanced measures of financial literacy and financial sophistication. This is important because financial literacy has been linked to economic behavior, including retirement planning and wealth accumulation. Women live longer than men and are likely to spend time in widowhood. As a result, improving women’s financial literacy is key to helping them prepare for retirement and promoting their financial security.
Employee Financial Literacy and Retirement Plan Behavior: A Case Study
Robert Clark, Annamaria Lusardi, and Olivia S. Mitchell
Forthcoming in Economic Inquiry
Abstract: This paper uses administrative data on all active employees of the Federal Reserve System to examine participation in and contributions to the Thrift Saving Plan, the System’s defined contribution (DC) plan. We link to administrative records a unique employee survey of economic/demographic factors including a set of financial literacy questions. Not surprisingly, Federal Reserve employees are substantially more financially literate than the population at large. Most importantly, financially savvy employees are also most likely to participate in their DC plan. Sophisticated workers contribute three percentage points more of their earnings to the DC plan than do the less knowledgeable, and they hold more equity in their pension accounts. We examine changes in employee plan behavior one year after employees completed a Learning Module about retirement planning, and we compare it to baseline patterns. We find that those employees who completed the Learning Module were more likely to start contributing and less likely to have stopped contributing to the DC plan post-survey. In sum, employer-provided learning programs are shown to significantly impact employee retirement saving decisions and consistent with a lot of other research, higher levels of financial literacy is found to have a beneficial impact on retirement saving patterns.
FINANCIAL KNOWLEDGE AND 401(K) INVESTMENT PERFORMANCE: A CASE STUDY
Robert Clark, Annamaria Lusardi, and Olivia S. Mitchell
Forthcoming in the Journal of Pension Economics and Finance
Abstract: We explore whether investors who are more financially knowledgeable earn more on their retirement plan investments compared to their less sophisticated counterparts, using a unique new dataset linking administrative data on investment performance and financial knowledge. Results show that the most financially knowledgeable investors: (a) held 18 percentage points more stock than their least knowledgeable counterparts; (b) could anticipate earning 8 basis points per month more in excess returns; (c) had 40% higher portfolio volatility; and (d) held portfolios with about 38% less idiosyncratic risk, as compared to their least savvy counterparts. Our results are qualitatively similar after controlling on observables as well as modeling sample selection. We also examine portfolio changes to assess the potential impact of the financial literacy intervention. Controlling on other factors, those who elected to take the Financial Literacy survey boosted their equity allocations by 66 basis points and their monthly expected excess returns rose by 2.3 basis points; no significant difference in volatility or nonsystematic risk was detected before versus after the survey. While these findings relate to only one firm, we anticipate that they may spur other efforts to enhance financial knowledge in the workplace.
Annamaria Lusardi, Pierre-Carl Michaud, and Olivia S. Mitchell
Forthcoming in the Journal of Political Economy
Abstract: We show that financial knowledge is a key determinant of wealth inequality in a stochastic lifecycle model with endogenous financial knowledge accumulation, where financial knowledge enables individuals to better allocate lifetime resources in a world of uncertainty and imperfect insurance. Moreover, because of how the U.S. social insurance system works, better-educated individuals have most to gain from investing in financial knowledge. Our parsimonious specification generates substantial wealth inequality relative to a one-asset saving model and one where returns on wealth depend on portfolio composition alone. We estimate that 30-40 percent of retirement wealth inequality is accounted for by financial knowledge.
Financial Literacy Skills for the 21st Century: Evidence from PISA
Journal of Consumer Affairs | Volume 49 | No. 3 | Fall 2015
Foreward: I am delighted to be asked to give the Colston Warne Lecture at the American Council on Consumer Interests annual conference. What I want to cover in this lecture is what I consider to be one of the most important topics for consumers: financial literacy. This topic is particularly important for the young and, in this lecture, I will describe the findings from the first international survey on financial literacy among high school students: the Programme for International Student Assessment (PISA). I am honored to chair the financial literacy expert group that designed the financial literacy assessment in PISA. Our journey to design that assessment included meetings in many countries and lasted for several years. It is one of the works I have enjoyed the most. I hope the findings from PISA will be a catalyst for changes in education policies, including adding financial literacy to school curricula.
Visual Tools and Narratives: New Ways to Improve Financial Literacy
Annamaria Lusardi, Anya Samek, Arie Kapteyn, Lewis Glinert, Angela Hung, and Aileen Heinberg
Forthcoming in the Journal of Pension Economics and Finance
Abstract: We developed and experimentally evaluated four novel educational programs delivered
online: an informational brochure, a visual interactive tool, a written narrative, and a
video narrative. The programs were designed to inform people about risk diversification,
an essential concept for financial decision-making. The effectiveness of these programs
was evaluated using the American Life Panel. Participants were exposed to one of the
programs, and then asked to answer questions measuring financial literacy—in particular,
risk literacy—and self-efficacy. All of the programs were found to be effective at
increasing self-efficacy, and several improved financial literacy, providing new evidence
for the value of programs designed to improve financial decision-making.
Financial Literacy and Retirement Planning in Canada
David Boisclair, Annamaria Lusardi, and Pierre-Carl Michaud
Forthcoming in the Journal of Pension Economics and Finance
Abstract: In this paper, we draw on internationally comparable survey evidence on financial literacy and retirement planning in Canada to investigate how financially literate Canadians are and how financial literacy is linked to retirement planning. We find that 42 percent of respondents are able to correctly answer three simple questions measuring knowledge of interest compounding, inflation, and risk diversification. This is consistent with evidence from other countries, and Canadians perform relatively well in comparison to Americans but worse than individuals in other countries, such as Germany. Among Canadian respondents, the young and the old, women, minorities, and those with lower educational attainment do worse, a pattern that has been consistently found in other countries as well. Retirement planning is strongly associated with financial literacy; those who responded correctly to all three financial literacy questions are 10 percentage points more likely to have retirement savings.
Debt Literacy, Financial Experiences, and Overindebtedness
Annamaria Lusardi and Peter Tufano
Journal of Pension Economics and Finance | Volume 14 | Issue 4 | October 2015
Abstract: We analyze a national sample of Americans with respect to their debt literacy, financial experiences, and their judgments about the extent of their indebtedness. Debt literacy is a component of broader financial understanding that measures knowledge about debt and self-assessed financial knowledge. Financial experiences are the participants’ reported experiences with traditional borrowing, alternative borrowing, and investing. Overindebtedness is a self-reported measure. Debt literacy is low, with only about one-third of the population grasping the basics of interest compounding. Even after controlling for demographics, we find a relationship between debt literacy and both financial experiences and debt loads. Individuals with lower levels of debt literacy tend to transact in high-cost manners, incurring higher fees and using high-cost borrowing. We provide a rough estimate of the national implications of debt ignorance on credit card costs by consumers. Less knowledgeable individuals also report that their debt loads are excessive or that they are unable to judge their debt position.
Abstract: This paper reviews what we have learned over the past decade about financial literacy and its relationship to financial decision-making around the world. Using three questions, we have surveyed people in several countries to determine whether they have the fundamental knowledge of economics and finance needed to function as effective decision-makers. We find that levels of financial literacy are low not only in the United States but also in many other countries including those with well-developed financial markets. Moreover, financial illiteracy is particularly acute for some demographic groups, especially women and the less-educated. These findings are important since financial literacy is linked to borrowing, saving, and spending patterns. We also offer new evidence on financial literacy among high school students drawing on the 2012 Programme for International Student Assessment implemented in 18 countries. Last, we discuss the implications of this research for policy.
BANKRUPTCY RATES AMONG NFL PLAYERS WITH SHORT-LIVED INCOME SPIKES
Kyle Carlson, Joshua Kim, Annamaria Lusardi, and Colin F. Camerer
American Economic Review | Volume 105 | No. 5 | May 2015
Abstract: One of the central predictions of the life-cycle hypothesis is that individuals smooth consumption over their economic life cycle; thus, they save when income is high, in order to provide for when income is likely to be low, such as after retirement. We test this prediction in a group of people—players in the National Football League (NFL)—whose income profile does not just gradually rise then fall, as it does for most workers, but rather has a very large spike lasting only a few years. We collected data on all players drafted by NFL teams from 1996 to 2003. Given the difficulty of directly measuring consumption of NFL players, we test whether they have adequate savings by counting how many retired NFL players file for bankruptcy. Contrary to the lifecycle model predictions, we find that initial bankruptcy filings begin very soon after retirement and continue at a substantial rate through at least the first 12 years of retirement. Moreover, bankruptcy rates are not affected by a players total earnings or career length. Having played for a long time and been well-paid does not provide much protection against the risk of going bankrupt.
The Economic Crisis and Medical Care Use: Comparative Evidence from Five High-Income Countries
Annamaria Lusardi, Daniel Schneider and Peter Tufano
Social Science Quarterly | Volume 96 | Issue 1 | March 2015
Abstract: Objective. We examine how the economic crisis has affected individuals’ use of
routine medical care and assess the extent to which the impact varies depending on
national context. Methods. Data from a new cross-national survey fielded in the
United States, Great Britain, Canada, France, and Germany are used to estimate the
effects of employment and wealth shocks and financial fragility on the use of routine
care. Results. We document reductions in individuals’ use of routine nonemergency
medical care in the midst of the economic crisis. Americans reduced care more than
individuals in Great Britain, Canada, France, and Germany. At the national level,
reductions in care are related to the degree to which individuals must pay for it, and
within countries, reductions are linked to shocks to wealth and employment and to
financial fragility. Conclusions. The economic crisis has led to reductions in the use
of routine medical care, and systems of national insurance provide some protection
against these effects.
Italian Economic Journal | Volume 1 | No. 1 | March 2015
Abstract: I examine financial literacy—specifically knowledge of risk—using data
from surveys in the United States and other countries. I show that risk literacy is very
low; the majority of individuals lack knowledge of concepts such as risk diversification
and do not understand the relationship between risk and return. Findings are strikingly
similar across countries; a third of survey respondents in most countries report that they
do not know the answer to risk literacy questions. I also show that risk literacy matters
for financial decisions; those who are more knowledgeable about risk are more likely
to have precautionary savings and to plan for retirement. Given that individuals have
much greater responsibility for their financial well-being before and after retirement
than in the past, addressing lack of financial literacy, including risk literacy, may
provide new ways to promote saving and financial security.
FINANCIAL LITERACY: DO PEOPLE KNOW THE ABCs OF FINANCE?
Public Understanding of Science | Volume 24 | No. 3 | 2015
Abstract: Increasingly, individuals are in charge of their own financial security and are confronted with ever more complex financial instruments. However, there is evidence that many individuals are not well-equipped to make sound saving decisions. This paper looks at financial literacy, which is defined as the ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt, and pensions. Failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior can all be linked to ignorance of basic financial concepts. Financial literacy impacts financial decision-making, with implications that apply to individuals, communities, countries, and society as a whole. Given the lack of financial literacy among the population, it may be important to remedy it by adding financial literacy to the school curriculum.
Abstract: While financial knowledge has been linked to improved financial behaviour, there is little consensus on the value of financial education, in part because rigorous evaluation of various programmes has yielded mixed results. However, given the heterogeneity of financial education programmes in the literature, focusing on ‘generic’ financial education can be inappropriate and even misleading. Lusardi (2009) and others argue that pedagogy and delivery matter significantly. In this paper, we design and field a low-cost, easily-replicable financial education programme called ‘Five Steps’, covering five basic financial planning concepts that relate to retirement. We conduct a field experiment to evaluate the overall impact of Five Steps on a probability sample of the American population. In different treatment arms, we quantify the relative impact of delivering the programme through video and narrative formats. Our results show that short videos and narratives (each takes about 3 minutes) have sizeable short-run effects on objective measures of respondent knowledge. Moreover, keeping informational content relatively constant, format has significant effects on other psychological levers of behavioural change: effects on self-efficacy are significantly higher when videos are used, which ultimately influences knowledge acquisition. Follow-up tests of respondents’ knowledge approximately 8 months after the interventions suggest that between one-quarter and one-third of the knowledge gain and about one-fifth of the self-efficacy gain persist. Thus, this simple programme has effects both in the short run and medium run.
Annamaria Lusardi, Olivia S. Mitchell, and Vilsa Curto
Journal of Pension Economics and Finance | Volume 13 | No. 4 | October 2014
Abstract: This paper examines data on financial sophistication among the U.S. older population, using a special-purpose module implemented in the Health and Retirement Study. We show that financial sophistication is deficient for older respondents (aged 55+). Specifically, many in this group lack a basic grasp of asset pricing, risk diversification, portfolio choice, and investment fees. Subpopulations with particular deficits include women, the least educated, persons over the age of 75, and non-Whites. In view of the fact that people are increasingly being asked to take on responsibility for their own retirement security, such lack of knowledge can have serious implications.
THE ECONOMIC IMPORTANCE OF FINANCIAL LITERACY: THEORY AND EVIDENCE
Annamaria Lusardi and Olivia S. Mitchell
Journal of Economic Literature | Volume 52 | No. 1 | March 2014
This paper undertakes an assessment of a rapidly growing body of economic research on financial literacy. We start with an overview of theoretical research, which casts financial knowledge as a form of investment in human capital. Endogenizing financial knowledge has important implications for welfare, as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little) people know and identify the least financially savvy population subgroups. This is followed by an examination of the impact of financial literacy on economic decision making in the United States and elsewhere. While the literature is still young, conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps. A final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy.
FINANCIAL LITERACY AND QUANTITATIVE REASONING IN THE HIGH SCHOOL AND COLLEGE CLASSROOM
Annamaria Lusardi and Dorothy Wallace
Numeracy | Volume 6 | Issue 2 | July 2013
Abstract: This overview frames the eight articles devoted to financial literacy in this issue of Numeracy. The survey questions used to assess financial literacy in the United States, Romania, France, Switzerland, Australia, and elsewhere include mathematics that is routinely covered in mathematics and quantitative reasoning courses. Financial literacy, wherever it is received, appears to benefit people throughout their lives. The close tie between quantitative and financial literacy may be exploited to introduce more of both into the high school and undergraduate curriculum.
Financial Literacy and Financial Behavior among Young Adults: Evidence and Implications
Carlo de Bassa Scheresberg
Numeracy | Volume 6 | Issue 2 | July 2013
Abstract: This paper uses data from the 2009 National Financial Capability Study to examine financial literacy and financial behavior in a sample of approximately 4,500 young adults age 25 to 34. The paper finds that most young adults lack basic financial knowledge. Financial literacy is especially low among certain demographic groups, such as women, minorities, and lower-income or less-educated people. A high level of education, however, is not a guarantee of financial literacy. Only 49% of young respondents with a college education and 60% of young respondents with postgraduate education could correctly answer three simple questions designed to assess financial literacy. Results show that respondents who display higher financial literacy or higher confidence in their math or personal finance knowledge have better financial outcomes: they are less likely to use high-cost borrowing methods, and they are more likely to plan for retirement or have set aside savings for emergencies.
Journal of Pension Economics and Finance | Volume 10 | Issue 4 | October 2011
Abstract: In an increasingly risky and globalized marketplace, people must be able to make well informed ﬁnancial decisions. New international research demonstrates that ﬁnancial illiteracy is widespread in both well-developed and rapidly changing markets. Women are less ﬁnancially literate than men, the young and the old are less ﬁnancially literate than the middle-aged, and more educated people are more ﬁnancially knowledgeable. Most importantly, the ﬁnancially literate are more likely to plan for retirement. Instrumental variables estimates show that the eﬀects of ﬁnancial literacy on retirement planning tend to be underestimated. In sum, around the world, ﬁnancial literacy is critical to retirement security.
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