June 2024
Abstract: Since 2012, the Programme for International Student Assessment (PISA), an initiative of the Organisation for Economic Co-operation and Development (OECD), conducted triennial tests to evaluate the financial literacy of 15-year-old students in various countries. These data provide an opportunity to study the determinants of financial literacy among the young and how it evolves over time. This article examines the data collected so far (2012, 2015, 2018), documents stylized facts across waves, and provides guidance on using the test scores estimated from psychometric models.
April 2024
Abstract: This article provides a concise narrative overview of the rapidly growing empirical literature on financial literacy and financial education. We first discuss stylized facts on the demographic correlates of financial literacy. We next cover the evidence on the effects of financial literacy on financial behaviors and outcomes. Finally, we review the evidence on the causal effects of financial education programs focusing on randomized controlled trial evaluations. The article concludes with perspectives on future research priorities for both financial literacy and financial education.
March 2024
Abstract: This paper provides evidence on how a low-cost, online, and scalable financial education program influences older participants’ financial knowledge. We tested the program using a field experiment that included short stories covering three fundamental financial education topics: compound interest, risk diversification, and inflation. Two surveys were administered eight months apart to measure the effects of those stories on participants’ short-term and longer-term knowledge and financial distress indicators. We show that the risk diversification story was the most effective at improving participants’ knowledge, in both the short and longer term. The compound interest and inflation stories significantly increased participants’ knowledge in the short term, but the gain in financial literacy declined over time.
July 2023
Abstract: In this study, we surveyed over 16,000 respondents in eight countries to collect information on individuals’ preferences for sustainable investing, ownership of ESG investment products, as well as their level of financial literacy, investing sophistication and understanding of topics connected to ESG criteria. We find that interest in sustainable investing is popular among adults in the eight countries, especially among younger generations. However, actual ownership of ESG investments is still limited in most countries. Most importantly, many investors lack awareness about the sustainability profile of their investments and believe that lack of knowledge, experience, and transparency are the main barriers to ESG investing. When we assessed respondents’ knowledge of topics connected to ESG criteria and financial and investing concepts, we found that most respondents and investors lack the basic knowledge to make savvy investment decisions regarding ESG investing.
November 2021
Abstract: The economic consequences of the COVID-19 pandemic have not been felt equally among individuals, with millennials and Gen Z among those hit hardest. We examine responses to a novel survey conducted in May 2021 to understand how the pandemic has influenced personal finances of individuals 40 and under. We find that the pandemic has had a large impact on individuals’ debt and financial anxiety. We also find that the main financial challenges and sources of anxiety differ by generation. Millennials are struggling with debt and debt management, whereas Gen Z struggles with uncertain income and unexpected expenses. While the pandemic has increased uncertainty and financial anxiety, it also provides an opportunity for financial education. Survey responses indicate that millennials and Gen Z are highly motivated to improve their financial literacy and savings.
January 2022
Abstract: This paper examines the complex nature of financial vulnerability in the United States through the adoption of factor analysis to identify the underlying constructs of financial security. Using data from the FINRA Foundation’s 2018 National Financial Capability Study (NFCS), we identify three underlying factors of financial vulnerability: (1) debt and cash flow management, (2) wealth building and planning, and (3) an understanding financial risks and financial literacy. A composite vulnerability index is created based on the three factors. Linear Probability Regression analyses are used to examine the association between sociodemographic characteristics (e.g., age, race/ethnicity, and income) and vulnerability scores.
July 2021
Abstract: Recent research has documented that people are increasingly entering old age holding more debt than ever before, and having done little or no retirement planning. This paper examines some of the reasons why older peoples’ financial behaviors depart from the predictions of the life cycle model, where the latter predicts that older persons would be at the peak of their wealth accumulation process, and manage their money so as not to run out of savings in retirement. Drawing on the rapidly-growing literature on financial literacy and financial behavior at older ages, we highlight findings on financial literacy patterns. We also document that “better” financial behaviors are strongly associated with greater financial literacy in later life. We close with some thoughts regarding limitations, policy implications, and next steps.
March 2021
Abstract: Women are less financially literate than men. It is unclear whether this gap reflects a lack of knowledge or, rather, a lack of confidence. Our survey experiment shows that women tend to disproportionately respond “do not know” to questions measuring financial knowledge, but when this response option is unavailable, they often choose the correct answer. We estimate a latent class model and predict the probability that respondents truly know the correct answers. We find that about one-third of the financial literacy gender gap can be explained by women’s lower confidence levels. Both financial knowledge and confidence explain stock market participation.
Click here for the highlights and key findings of this paper.
Click here for the NBER working paper.
Click here for the Centre for Economic Policy Research working paper.
February 2021
We introduce a method for experimentally evaluating interventions designed to improve the quality of choices in settings where people imperfectly comprehend consequences. Among other virtues, our method yields an intuitive sufficient statistic for welfare that admits formal interpretations even when consumers suffer from biases outside the scope of analysis. We use it to study a financial education intervention, which we find improves the quality of decisions only when it incorporates practice and feedback, contrary to the implications of analyses based on conventional efficacy metrics. We trace the failures of conventional metrics to violations of assumptions that our method avoids.
December 2020
Abstract: We draw on new high-frequency survey data collected from repeated cross-sections of Americans between June and November 2020. These data capture rich measures of household financial fragility and employment status. We find evidence of a building “second wave” of negative shocks to household finances and of growing inequality in financial fragility by household income, educational attainment, and gender from August to November of 2020. Finally, using difference-in-difference models, we estimate that the expiration of the CARES Act’s Pandemic Unemployment Compensation benefits, which augmented unemployment insurance by $600 a week, significantly increased the financial fragility of unemployed workers in America.
December 2020
Abstract: Poor financial capability can erode well-being in later life. To explore debt and debt management among older Americans, age 51-61, we designed and analyzed a new module in the 2018 Health and Retirement Study along with information from the 2018 National Financial Capability Study. Even though this group should be at the peak of their retirement savings, it nevertheless carries debt due to student loans and unpaid medical bills; having children also contributes to carrying debt close to retirement. By contrast, the financially literate have more positive financial perceptions and behaviors. Specifically, being able to answer one additional financial literacy question correctly is associated with a higher probability of reporting an above average credit record and planning for retirement. Higher financial literacy is also linked to being less likely to carry excessive debt, being contacted by debt collectors, and carrying medical debt or student loans, even after accounting for a large range of demographics and other characteristics. Evidently, financial knowledge can help limit debt exposure at older ages.
Click here for the Centre for Economic Policy Research working paper.
Click here for the NBER working paper.
Click here to see the January 2020 version of this working paper.
November 2020
Abstract: We examine gender differences in financial literacy among high school students in Italy using data from the 2012 Programme for International Student Assessment (PISA). Gender differences in financial literacy are large among the young in Italy. They are present in all regions and are particularly severe in the South and the Islands. Combining the rich PISA data with a variety of other indicators, we provide a thorough analysis of the potential determinants of the gender gap in financial literacy. We find that parental background, in particular the role of mothers, matters for the financial knowledge of girls. Moreover, we show that the social and cultural environment in which girls and boys live plays a crucial role in explaining gender differences. We also show that history matters: Medieval commercial hubs and the nuclear family structure created conditions favorable to the transformation of the role of women in society, and shaped gender differences in financial literacy as well. We discuss the changes that are needed to close the gap in financial knowledge among the young.
November 2020
Abstract: We administered the FINRA Foundation’s National Financial Capability Study questionnaire to members of the RAND American Life Panel (ALP) in 2012 and 2018. Using this unique, longitudinal data set, we investigate the evolution of financial literacy over time and shed light on the causal effect of financial knowledge on financial outcomes. Over a six-year observation period, financial literacy appears to be rather stable, with a slight tendency to decline at older ages. Moreover and importantly, financial literacy has significant predictive power for future financial outcomes, even after controlling for baseline outcomes and a wide set of demographics and individual characteristics that influence financial decision making. This estimated relationship is significantly stronger for older individuals, for women, and for those with lower income than for their counterparts in the study. Altogether, our findings suggest that differences in the stock of financial knowledge may lead to increasing inequality over the life course.
Click here for the Centre for Economic Policy Research working paper.
Click here for the NBER working paper.
November 2020
Abstract: Early in the COVID-19 pandemic, much of the US economy was closed to limit the virus’ spread, and several emergency interventions were implemented. Our analysis of older (45-75) respondents fielded in April-May of 2020 indicates that about one in five respondents was financially fragile and would have difficulty facing a mid-size emergency expense. Some subgroups were at particular risk of facing financial difficulties, especially younger respondents, those with larger families, Hispanics, and the low income. Moreover, the more financially literate were better able to handle such shocks, indicating that knowledge can provide some additional protection during a pandemic.
This paper was published by the American Economic Association in May 2021, Volume 111. Click here to access the published paper.
April 2020
Abstract: We study the rapidly growing literature on the causal effects of financial education programs in a meta-analysis of 76 randomized experiments with a total sample size of over 160,000 individuals. The evidence shows that financial education programs have, on average, positive causal treatment effects on financial knowledge and downstream financial behaviors. Treatment effects are economically meaningful in size, similar to those realized by educational interventions in other domains and are at least three times as large as the average effect documented in earlier work. These results are robust to the method used, restricting the sample to papers published in top economics journals, including only studies with adequate power, and accounting for publication selection bias in the literature. We conclude with a discussion of the cost-effectiveness of financial education interventions.
Click here for the NBER working paper.
Click here for the Centre for Economic Policy Research working paper.
March 2020
Abstract: We introduce a novel survey measure of attitude toward debt. Matching our survey results with panel data on Swedish household balance sheets from registry data, we show that our debt attitude measure helps explain individual variation in indebtedness as well as debt build-up and spending behavior in the period 2004–2007. As an explanatory variable, debt attitude compares well to a number of other determinants of debt, including education, risk-taking, and financial literacy. We also provide evidence that suggests that debt attitude is passed down along family lines and has a cultural element.
Forthcoming in The Scandinavian Journal of Economics.
Click here to see the July 2019 version of this working paper.
Click here to see the July 2018 version of this working paper.
November 2019
Abstract: This research highlights the importance of designing and offering financial education programs that will optimally meet the needs and address the concerns of this diverse population. To improve financial well-being, programs should be tailored to the financial situation of their participants.
July 2019
Abstract: We introduce a novel survey measure of attitude toward debt. Matching our survey results with panel data on Swedish household balance sheets from registry data, we show that our debt attitude measure helps explain individual variation in indebtedness as well as debt build-up and consumption behavior in the period 2004–2007. As an explanatory variable, debt attitude compares well to a number of other determinants of debt, including education, risk-taking, and financial literacy. We also provide evidence that debt attitude is passed down along family lines and has a cultural element.
Click here to see the July 2018 version of this working paper.
June 2019
Abstract: We analyze debt and debt management of Americans nearing retirement age, and we show that older people have numerous financial obligations that can lead to financial distress. Drawing on the 2015 National Financial Capability Study and an extensive literature review, we find that lack of financial literacy, lack of information, and behavioral biases help explain the prevalence of debt later in life. Our evidence also indicates that debt at older ages can negatively influence retirement well-being.
Click here to see the report.
Click here to see the November 2020 published version of this paper.
June 2019
Abstract: Retirement investing in the United States has changed dramatically. The classic defined-benefit (DB) plan has largely been replaced by the defined-contribution (DC) plan. With the latter, individual employees’ decisions about how much to save for retirement and how to invest those savings determine the benefits available upon retirement. We analyze data from the 2015 National Financial Capability Study to show that people whose only exposure to investment decisions is by virtue of their participation in an employer-sponsored 401(k) plan are poorly equipped to make sound investment decisions. Specifically, they suffer from higher levels of financial illiteracy than other investors. This lack of financial literacy is critical both because of the financial consequences of poor financial decisions and because of a legal structure that relies on participant choice to limit the fiduciary obligations of the employer with respect to the structure and options provided by the retirement plan. In response to this concern, we propose mandated employer-provided financial education to address limited employee financial literacy. We identify and discuss three requirements that a financial education program should incorporate – a self-assessment, minimum substantive components, and timing. Formalizing the employer role in evaluating and increasing financial literacy among plan participants is a key step in providing retirement plan participants with the resources necessary to manage important decisions regarding retirement planning and, ultimately, for enhancing the financial security of American workers.
This paper was published by the Cornell Law Review in May 2020, Volume 105 , Issue 3 & Issue 4. Click here to access the published paper.
Click here to see the summary of the paper at the Harvard Law School Forum on Corporate Governance and Financial Regulation.
March 2019
Abstract: Several years after the financial crisis, financial fragility is not only pervasive in the U.S economy but also prevalent among middle-income households. This highlights the need to consider more than asset levels in order to understand household financial resilience. In this paper, we explore the determinants of financial fragility for American households in the middle-income bracket (earning $50–$75K annually) using data from the 2015 National Financial Capability Study. We analyze the socioeconomic characteristics and balance sheets of these households with focus on their debt management and expenses. According to our empirical analysis, three main factors impact financial fragility of middle-income households: family size, debt burden, and financial literacy. First, because a portion of household financial resources are committed to children, family size plays an important role in financial fragility. Second, middle-income households have a lot of debt, and the data shows that debt increases with income. While middle-income households do own assets, they are highly leveraged. In addition, they are using high-cost borrowing methods to cope with emergency expenses. Third, financial literacy is very low among financially fragile middle-income households, which is potentially problematic when there are assets and debt to manage. Moreover, we find that financial fragility has long-term consequences, as financially fragile households are much less likely to plan for retirement.
July 2018
Abstract: The consequences of poor financial capability at older ages are serious and include making mistakes with credit, spending retirement assets too quickly, and being defrauded by financial predators. Because older persons are at or past the peak of their wealth accumulation, they are often the targets of fraud. Our project analyzes a module we developed and fielded in the 2016 Health and Retirement Study (HRS). Using this dataset, we evaluate the incidence and risk factors for investment fraud, prize/lottery scams, and account misuse, using regression analysis. Relatively few HRS respondents mentioned any single form of fraud over the prior five years, but nearly 5% reported at least one form of investment fraud, 4 % recounted prize/lottery fraud, and 30% indicated that others had used/attempted to use their accounts without permission. There were few risk factors consistently associated with such victimization in the older population. Fraud is a complex phenomenon and no single factor uniquely predicts victimization. The incidence of fraud could be reduced by educating consumers about various types of fraud and by increasing awareness among financial service professionals.
April 2018
Abstract: This project examines financial fragility in the United States, which is measured as individuals’ ability to cope with unexpected expenses. Using data from the 2015 National Financial Capability Study and the 2015 Survey of Household Economics and Decisionmaking, we identify subgroups of the U.S. population that are most financially fragile. We observe widespread fragility across the entire population – more than one third of Americans are financially fragile. Several years after the financial crisis, financial fragility is not only pervasive, but many middle-income households also suffer from the inability to deal with shocks. Our measure captures several factors that contribute to financial fragility, including lack of assets and indebtedness. The quantitative findings are also supported by qualitative data from focus group interviews. We explore the long-term implications of being financially fragile and its effects on retirement planning – individuals who are fragile in the short term may end up being financially insecure in the long term as well. Our findings point to the need to incentivize short-term savings in a way that is complementary to the institutionalized mechanisms of saving for retirement and other long-term goals. Focus groups also complement our empirical findings regarding the need and benefits of improving
financial literacy to make individuals less financially fragile.
November 2017
Abstract: We introduce a method for measuring the quality of financial decisions built around a notion of financial competence, which gauges the alignment between consumers choices and those they would make if they properly understood their opportunities. We prove our measure admits a formal welfare interpretation even when consumers suffer from additional decision-making flaws, known and unknown, outside the scope of analysis. An application illuminates the pitfalls of the types of brief rhetoric-laden interventions commonly used for adult financial education: they affect behavior through unintended mechanisms, and hence may not improve decisions even when they perform well according to conventional metrics.
Click here to see the August 2016 version of this working paper.
Click here to see the June 2015 version of this working paper.
June 2017
Abstract: We analyze older individuals’ debt and financial vulnerability using data from the Health and Retirement Study (HRS) and the National Financial Capability Study (NFCS). Specifically, in the HRS we examine three different cohorts (individuals age 56–61) in 1992, 2004, and 2010 to evaluate cross-cohort changes in debt over time. We also use two waves of the NFCS (2012 and 2015) to gain additional insights into debt management and older individuals’ capacity to shield themselves against shocks. We show that recent cohorts have taken on more debt and face more financial insecurity, mostly due to having purchased more expensive homes with smaller down payments.
September 2016
Abstract: We study entrepreneurship among Baby Boomers using data from the US Health and Retirement Study (HRS). Using two different definitions of entrepreneurship (being self-employed and being a business owner), we compare entrepreneurs to non-entrepreneurs and entrepreneurs who were age 52–65 in the 2012 HRS to their counterparts (i.e., those age 52–65) in the 1998 HRS. We find that entrepreneurs are systematically different from the rest of the population; specifically, they are more highly educated, healthier, wealthier, and more likely to be white and male. When we compare the cohort of Baby Boomer entrepreneurs surveyed in 2012 to entrepreneurs in the same age range in 1998, we find that Baby Boomer entrepreneurs are older, are less likely to be white, have a higher level of education, have fewer children and grandchildren, and are in poorer physical health. Finally, using partial identification methods, we find some evidence for a positive causal impact of wealth on business ownership, but only for the highest levels of wealth.
August 2016
Abstract: The goal of this paper is to ascertain whether older women’s current and anticipated future labor force patterns have changed over time, and if so, to evaluate the factors associated with longer work lives and plans to continue work at older ages. Using data from both the Health and Retirement Study (HRS) and the National Financial Capability Study (NFCS), we show that older women’s current and intended future labor force attachment patterns are changing over time. Specifically, compared to our 1992 HRS baseline, more recent cohorts of women in their 50’s and 60’s are more likely to plan to work longer. When we explore the reasons for delayed retirement among older women, factors include education, more marital disruption, and fewer children than prior cohorts. But household finances also play a key role, in that older women today have more debt than previously and are more financially fragile than in the past. The NFCS data show that factors associated with retirement planning include having more education and greater financial literacy. Those who report excessive amounts of debt and are financially fragile are the least financially literate, had more dependent children, and experienced income shocks. Thus shocks do play a role in older women’s debt status, but it is not enough to have resources: people also need the capacity to manage those resources if they are to stay out of debt as they head into retirement.
August 2016
Abstract: We introduce a method for measuring the quality of financial decision making built around a notion of financial competence, which gauges the alignment between individuals’ choices and those they would make if they properly understood their opportunities. We use it to document the potential pitfalls of the types of brief rhetoric-laden interventions commonly used for adult financial education. Motivational rhetoric can render the effects of such interventions indiscriminate even when people appear to understand and internalize the targeted concepts. Conventional methods of evaluation involving financial literacy, self-reported decision strategies, and directional effects on choices do not reliably detect these deficiencies.
Click here to see the original version of this working paper.
Click here to see the online appendix.
February 2016
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.
Click here for the version to be published in the Journal of Consumer Affairs.
Colston Warne Lecture | September 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.
Click here for the version published in the Journal of Consumer Affairs.
Click here to see the PowerPoint presentation that accompanied this lecture.
August 2015
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 have appended to the administrative records a unique employee survey of economic/demographic factors including a set of financial literacy questions. Not surprisingly, Federal Reserve employees are more financially literate than the general population; furthermore, the most financially savvy are also most likely to participate in and contribute the most to their 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. Finally, we examine changes in employee plan behavior a year after the financial literacy survey and compare it to the baseline. We find that employees who completed an educational module were more likely to start contributing and less likely to have stopped contributing to the DC plan post-survey.
Click here for the version to be published in Economic Inquiry.
July 2015
Abstract: Prior studies disagree regarding the effectiveness of financial literacy programs, especially those offered in the workplace. To explain such measurement differences in evaluation and outcomes, we employ a stochastic life cycle model with endogenous financial knowledge accumulation to investigate how financial education programs optimally shape key economic outcomes. This approach permits us to measure how such programs shape wealth accumulation, financial knowledge, and participation in sophisticated assets (e.g. stocks) across heterogeneous consumers. We then apply conventional program evaluation econometric techniques to simulated data, distinguishing selection and treatment effects. We show that the more effective programs provide follow-up in order to sustain the knowledge acquired by employees via the program; in such an instance, financial education delivered to employees around the age of 40 can raise savings at retirement by close to 10%. By contrast, one-time education programs do produce short-term but few long-term effects. We also measure how accounting for selection affects estimates of program effectiveness on those who participate. Comparisons of participants and non-participants can be misleading, even using a difference-in-difference strategy. Random program assignment is needed to evaluate program effects on those who participate.
Click here for the version published in the October 2020 issue of the Economics of Education Review.
June 2015
Abstract: We introduce the concept of financial competence, a measure of how closely individuals’ choices align with those they would make if they properly understood their opportunity sets. The concept is firmly rooted in the principles of choice-based behavioral welfare analysis and avoids the types of paternalistic judgments that pervade policy discussions. We document the importance of assessing financial competence by demonstrating experimentally that an educational intervention can appear highly successful according to conventional outcome measures while failing to improve the quality of financial decision making. We trace the mechanisms behind these seemingly divergent findings.
Click here to see the updated version of this working paper.
June 2015
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.
Click here for the version published in the Journal of Pension Economics and Finance.
April 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.
Click here for the version published in the American Economic Review.
January 2015
Abstract: This paper reviews what we have learned about financial literacy and its relationship to financial decision-making around the world. Using three simple questions, we have surveyed people in many countries to determine whether they have the fundamental knowledge of finance needed to function as effective economic decision makers. We show 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 newly-released Programme for International Student Assessment implemented in 18 countries. Last, we discuss the implications of this research for policy.
Click here for the version published in the Journal of Retirement.
December 2014
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—know little about concepts relevant for day-to-day financial decisions. Even women in favorable economic conditions are less financially knowledgeable than men. 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.
Click here to see the updated version of this working paper.
Click here for the version to be published in the Journal of Consumer Affairs.
October 2014
Abstract: We introduce the concept of financial competence, a measure of the extent to which individuals’ financial choices align with those they would make if they properly understood their opportunity sets. Unlike existing measures of the quality of financial decision making, the concept is firmly rooted in the principles of choice-based behavioral welfare analysis; it also avoids the types of paternalistic judgments that are common in policy discussions. We document the importance of assessing financial competence by demonstrating, through an example, that an educational intervention can appear highly successful according to conventional outcome measures while failing to improve the quality of financial decision making. Specifically, we study a simple intervention concerning compound interest that significantly improves performance on a test of conceptual knowledge (which subjects report operationalizing in their decisions), and appears to counteract exponential growth bias. However, financial competence (welfare) does not improve. We trace the mechanisms that account for these seemingly divergent findings.
October 2014
Abstract: Using a stochastic life cycle model with endogenous financial knowledge accumulation, we show that financial knowledge is a key determinant of wealth inequality. The mechanism we posit is that financial knowledge enables individuals to better allocate resources over their lifetimes in a world of uncertainty and imperfect insurance. Moreover, because of how the U.S. social insurance system works, better-educated individuals have the most to gain from investing in financial knowledge. As a result, making financial knowledge accumulation endogeneous amplifies differences in accumulated retirement wealth over the life cycle. According to our estimates, from 30 to 40 percent of wealth inequality can be accounted for by financial knowledge.
June 2014
Abstract: Financial literacy and Canadians’ capacity to plan for retirement is of primary importance for the policy debate over pension system reform in Canada. 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 who does plan for retirement. 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.
Click here for the version to be published in the Journal of Pension Economics and Finance.
June 2014
Abstract: In this paper, 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 RAND American Life Panel. Participants were exposed to one of the programs, and then asked to answer questions measuring financial 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 help individuals make financial decisions. The video was more effective at improving financial literacy scores than the written narrative, highlighting the power of online media in financial education.
May 2014
Abstract: In this paper, we design and field a low-cost, easily-replicable financial education program 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 program through video and narrative formats. Our results show that short videos and narratives (each takes about three minutes) have sizable short-run effects on objective measures of respondent knowledge. Moreover, keeping informational content relatively constant, format has significant effects on other psychological levers of behavioral change: effects on motivation and self-efficacy are significantly higher when videos are used, which ultimately influences knowledge acquisition. Follow-up tests of respondents’ knowledge approximately eight months after the interventions suggest that between one-quarter and one-third of the knowledge gain and about one-fifth of the self-efficacy gains persist. Thus, this simple program has effects both in the short run and medium run.
Click here for the version published in the Oxford Review of Economic Policy.
May 2014
Abstract: Using a unique new data set linking administrative data on investment performance and financial knowledge, we examine whether investors who are more financially knowledgeable earn more on their retirement plan investments, compared to their less sophisticated counterparts. We find that risk-adjusted annual expected returns are 130 basis points higher for the most financially knowledgeable employees, and those scoring higher on our Financial Knowledge Index have slightly more volatile portfolios while they do no better diversifying their portfolios than their peers. Overall, financial knowledge does appear to help people invest more profitably; this may provide a rationale for efforts to enhance financial knowledge in the population at large.
Click here to see the updated version of this working paper.
September 2013
Abstract: Many individuals lack the financial know-how to manage the complex new financial products increasingly available in the financial marketplace. How people borrow and manage debt has become of increasing policy maker concern, given recent evidence on Americans’ over-indebtedness. As a consequence, some have suggested that older persons today are much more likely to enter retirement age in debt compared to decades past. Our new paper seeks to empirically evaluate the factors associated with older individuals’ debt and debt management practices, and whether (and how) these patterns have changed significantly over time.
January 2013
Abstract: In this paper, we examine high-cost methods of borrowing in the United States, such as payday loans, pawn shops, auto title loans, refund anticipation loans, and rent-to-own shops, and offer a portrait of borrowers who use these methods. Considering a representative sample of more than 26,000 respondents, we find that about one in four Americans has used one of these methods in the past five years. Moreover, many young adults engage in high-cost borrowing: 34 percent of young respondents (age 18–34) and 43 percent of young respondents with a high school degree have used one of these methods. Using well-tested questions to measure financial literacy, we document that most high-cost borrowers display very low levels of financial literacy, i.e., they lack numeracy and do not possess knowledge of basic financial concepts. Most important, we find that those who are more financially literate are much less likely to have engaged in high-cost borrowing. Our empirical work shows that it is not only the shocks inflicted by the financial crisis or the structure of the financial system that explains why so many individuals have made use of high-cost borrowing methods; the level of financial literacy also plays a role.
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