Kim Davis, PhD, NCC, AFC


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Kim Davis, PhD, NCC, AFC

  1. 1. Kim Davis, PhD, NCC, AFC Assistant Professor of Consumer Science Texas State University @ San Marcos
  2. 2. <ul><li>Individuals and families </li></ul><ul><li>Banking and finance companies </li></ul><ul><li>Government agencies </li></ul><ul><li>Grass‐roots consumer and community interest groups </li></ul><ul><li>Universities and schools </li></ul>
  3. 3. <ul><li>For consumers to effectively use the broad spectrum of financial products and tools to effectively manage personal finances </li></ul><ul><ul><li>Cash flow management </li></ul></ul><ul><ul><li>Appropriate selection of financial products </li></ul></ul><ul><ul><li>Consumer protection </li></ul></ul><ul><ul><li>Pervasive and influences everyone—gender, race, age, socioeconomic lines </li></ul></ul>
  4. 4. <ul><li>Defining what we are “all” talking about! </li></ul><ul><ul><li>What is financial literacy? Financial education? </li></ul></ul><ul><ul><ul><li>No national standard </li></ul></ul></ul><ul><ul><ul><li>Core content or competencies </li></ul></ul></ul><ul><ul><ul><li>Assessment of success or behavioral change </li></ul></ul></ul><ul><ul><ul><li>No standards for educators teaching personal finance </li></ul></ul></ul><ul><ul><ul><li>(Hira & Schuchardt, 2008) </li></ul></ul></ul>
  5. 5. <ul><li>Defining what we are “all” talking about! </li></ul><ul><ul><li>Numerous perspectives of personal finance </li></ul></ul><ul><ul><ul><li>Economics </li></ul></ul></ul><ul><ul><ul><li>Sociology </li></ul></ul></ul><ul><ul><ul><li>Psychology </li></ul></ul></ul><ul><ul><ul><li>Adult learning </li></ul></ul></ul>
  6. 6. <ul><li>Family and Consumer Sciences Research Journal </li></ul><ul><li>Financial Services Review </li></ul><ul><li>Journal of Consumer Affairs </li></ul><ul><li>Journal of Family and Economic Issues </li></ul><ul><li>Journal of Financial Counseling and Planning Education </li></ul><ul><li>Journal of Financial Planning </li></ul><ul><li>Journal of Personal Finance </li></ul>
  7. 7. <ul><li>Social Exchange Theory (Homans, 1958) </li></ul><ul><li>Adult Learning Theory (Mezirow, 1981) </li></ul><ul><li>Human Ecological Model (Bronfrenbrenner, 1979) </li></ul><ul><li>Family Management System (Deacon & Firebaugh, 1988) </li></ul><ul><li>Lifecycle Hypothesis of Savings (Ando & Modigliani, 1963) </li></ul><ul><li>Behavioral Lifecycle Hypothesis Theory of Reasoned Action and Theory of Planned Behavior (Thaler & Shefrin, 1981) </li></ul><ul><li>Transtheoretical Model of Change (Nickols, 2008) </li></ul>
  8. 8. <ul><li>Effectiveness of Financial Education </li></ul><ul><ul><li>Adults participating in education programs are more likely to use a formal spending plan. </li></ul></ul><ul><ul><ul><li>Sample of U.S. military personnel </li></ul></ul></ul><ul><ul><li>Participants in high school financial education are more likely to: </li></ul></ul><ul><ul><ul><li>Have a savings account and save regularly, </li></ul></ul></ul><ul><ul><ul><li>Pay fewer bank fees </li></ul></ul></ul><ul><ul><ul><li>Read money management articles </li></ul></ul></ul><ul><ul><ul><li>Pay off credit card balances </li></ul></ul></ul><ul><ul><li>Indicates positive behavioral change </li></ul></ul><ul><ul><ul><li>(Bell, Gorin & Hogarth, 2009) </li></ul></ul></ul>
  9. 9. <ul><li>Effectiveness of Financial Education (cont.) </li></ul><ul><ul><li>Savings behaviors of people in states with a literacy mandate show no difference in savings rates from before the mandate to after. </li></ul></ul><ul><ul><ul><li>U.S. Census data </li></ul></ul></ul><ul><ul><li>Indicates positive behavioral change </li></ul></ul><ul><ul><ul><li>(Cole & Shastry, 2009) </li></ul></ul></ul>
  10. 10. <ul><li>Effectiveness of Financial Education (cont.) </li></ul><ul><ul><li>States with high school financial education tend to see saves at higher rates. </li></ul></ul><ul><ul><ul><li>Sample is unclear </li></ul></ul></ul><ul><ul><ul><li>Instrument designed by researchers for unrelated purpose </li></ul></ul></ul><ul><ul><li>Indicates positive behavioral change </li></ul></ul><ul><ul><ul><li>(Bernheim, Garrett & Maki, 2001) </li></ul></ul></ul>
  11. 11. <ul><li>Effectiveness of Financial Education (cont.) </li></ul><ul><ul><li>Studied impact of high school financial planning curriculum on behavior, knowledge, and self-efficacy </li></ul></ul><ul><ul><ul><li>National sample of teens using the curriculum </li></ul></ul></ul><ul><ul><ul><li>Immediately prior and 3 months out from exposure </li></ul></ul></ul><ul><ul><li>Significant changes in: </li></ul></ul><ul><ul><ul><li>Behavior </li></ul></ul></ul><ul><ul><ul><li>Knowledge </li></ul></ul></ul><ul><ul><ul><li>Self-efficacy </li></ul></ul></ul><ul><ul><li>Indicates positive behavioral change and knowledge </li></ul></ul><ul><ul><ul><li>(Danes, Huddleston-Casas, & Boyce, 1999) </li></ul></ul></ul>
  12. 12. <ul><li>Effectiveness of Financial Education (cont.) </li></ul><ul><ul><li>Jump$tart Coalition for Personal Financial Literacy </li></ul></ul><ul><ul><ul><li>(Mandell & Klien, 2009) </li></ul></ul></ul>Year 1998 2000 2002 2004 2006 2008 % Passing 57.3 51.9 50.2 52.3 52.4 48.3 Sample Size 1532 723 4024 4074 5775 6856
  13. 13. <ul><ul><li>College 2008 administration of the same instrument proved more promising </li></ul></ul><ul><ul><ul><li>Average score was 62.2%, sample size of 1080 </li></ul></ul></ul><ul><ul><ul><li>Nearly 15 percentage points above the 48.3% average of high school seniors </li></ul></ul></ul><ul><ul><ul><li>(Mandell & Klien, 2009) </li></ul></ul></ul>
  14. 14. <ul><li>Current thought and theory </li></ul><ul><ul><li>Promise of Consumer Sovereignty </li></ul></ul><ul><ul><ul><li>Welfare-enhancing choices can be taught </li></ul></ul></ul><ul><ul><ul><li>(Willis, 2008) </li></ul></ul></ul><ul><li>Comparison </li></ul><ul><ul><li>Sex education </li></ul></ul><ul><ul><li>Alcohol and drug prevention education </li></ul></ul><ul><ul><li>Health and wellness education </li></ul></ul>
  15. 15. <ul><li>Behavioral finance </li></ul><ul><li>Beginning Researchers </li></ul><ul><ul><li>Amos Tversky (1937-1996) </li></ul></ul><ul><ul><ul><li>Taught at Stanford University </li></ul></ul></ul><ul><ul><ul><li>Psychologist </li></ul></ul></ul><ul><ul><li>Daniel Kahneman (1934) </li></ul></ul><ul><ul><ul><li>Teaches at Princeton University </li></ul></ul></ul><ul><ul><ul><li>Psychologist </li></ul></ul></ul><ul><ul><li>Richard H. Thaler (1945) </li></ul></ul><ul><ul><ul><li>University of Chicago </li></ul></ul></ul><ul><ul><ul><li>Business Finance </li></ul></ul></ul><ul><li>Works attempt to explain irrational human economic choices. </li></ul>
  16. 16. <ul><li>Behavioral finance </li></ul><ul><li>Every financial decision should result from a rational calculation of its effect on our overall wealth. </li></ul>
  17. 17. <ul><li>Behavioral finance </li></ul>Principle Anchoring Explanation Clinging to a reference point (fact or figure) which should have no bearing on one's judgment or decision; knowing the logical relevance to the decision at hand Example(s) <ul><li>Fixed on a figure when selling, even when the value has increased or dropped </li></ul><ul><li>Brand loyalty </li></ul><ul><li>We are biased to information that confirms our beliefs </li></ul>Remedy <ul><li>Look for information that contradicts your beliefs </li></ul><ul><li>No substitute for rigorous critical thinking </li></ul><ul><li>Get second opinions </li></ul><ul><li>Disregard acquisition value when selling </li></ul><ul><li>Don’t be swayed by list prices (make an offer) </li></ul>
  18. 18. <ul><li>Behavioral finance </li></ul>Principle Mental Accounting Explanation Valuing some dollars less than others and more readily wasting them; separating money into accounts based on a variety of subjective criteria such as source, storage and purpose Example(s) <ul><li>Spending “gifted” or “found” money more readily </li></ul><ul><li>Gifts or tax returns </li></ul><ul><li>Spending more readily when using plastic </li></ul><ul><li>Burying small purchases into larger ones (e.g. new car extras, upgrades on a new home, extended warranties) </li></ul>Remedy <ul><li>Deposit “gifted” or “found” money into a savings account before spending </li></ul><ul><li>Convert the amount of the expense into $/hour cost </li></ul><ul><li>Break down large purchase into its parts and question the extras </li></ul><ul><li>Pay with cash instead of plastic </li></ul>
  19. 19. <ul><li>Behavioral finance </li></ul>Principle Hindsight or Confirmation Bias Explanation Encountering a situation with a preconceived opinion Example(s) <ul><li>A person believes that some past event was completely predictable </li></ul><ul><li>Someone is more likely to look for information that supports the original idea rather than seek out information that will contradict it </li></ul><ul><li>One-sided information skews frame of reference </li></ul>Remedy <ul><li>Find a dissenting voice of reason </li></ul>
  20. 20. <ul><li>Behavioral finance </li></ul>Principle Innumeracy Explanation Ignorance of the importance of key mathematical concepts in making sound financial decisions Example(s) <ul><li>Inflation - choosing conservative investments and becoming more vulnerable to inflation </li></ul><ul><li>Probability - being insurance poor </li></ul><ul><li>Bigness bias – neglecting small numbers that make a big difference over time (e.g. regular checking verses savings or investing) </li></ul>Remedy <ul><li>Invest or save regularly and for the long term </li></ul><ul><li>Raise insurance deductibles </li></ul><ul><li>Pick up spare change dropped </li></ul>
  21. 21. <ul><li>Behavioral finance </li></ul>Principle Gambler’s Fallacy – Related to Innumeracy Explanation Erroneous belief that the onset of a random event is likely to happen again while past events do not change probability Example(s) <ul><li>Believing that every losing pull of a slot machine arm puts a person one pull closer to a win </li></ul>Remedy <ul><li>Understand that in the case of independent events, the odds of a specific outcome on the next chance is exactly the same </li></ul>
  22. 22. <ul><li>Behavioral finance </li></ul>Principle Herd Instinct or &quot;Heard It Through the Grapevine&quot; Explanation Conforming to the behavior of others; mimicking the actions (rational or irrational) of a group Example(s) <ul><li>Buying because others are buying, or selling because others are selling </li></ul><ul><li>Acting on tips </li></ul><ul><li>Conforming because of social pressure </li></ul><ul><li>Believing a large group couldn’t be wrong </li></ul>Remedy <ul><li>Avoid the &quot;hot&quot; thing or fad </li></ul><ul><li>“ Tune out the noise” – disregard most financial news </li></ul><ul><li>Be a long-term value investor </li></ul>
  23. 23. <ul><li>Behavioral finance </li></ul>Principle Over-confidence / Over-optimism Explanation “ You’re probably not as smart as you think you are.” Tendency to over-estimate one's abilities, knowledge and skills Example(s) <ul><li>Too optimistic about when you will implement strategies </li></ul><ul><li>Think you are in better shape than you are </li></ul><ul><li>Assign success to &quot;skill&quot; and failure to &quot;bad luck&quot; </li></ul>Remedy <ul><li>Get a second opinion </li></ul><ul><li>Add 25% to anything you do (time or money) </li></ul><ul><li>Keep in mind that fund managers with the best information available still miss the mark in achieving good returns </li></ul>
  24. 24. <ul><li>Behavioral finance </li></ul>Principle Loss Aversion or Sunk Cost Fallacy Explanation <ul><li>People feel twice as strongly about the pain that comes from a loss than the pleasure that comes with an equal gain </li></ul><ul><li>Inability to forget money already spent makes us too ready to throw good money after bad </li></ul>Example(s) <ul><li>Holding on to losers, and selling a winner </li></ul><ul><li>Failing to realize that it’s not what “things” were worth in the past that’s important, but how much they’re worth now. </li></ul><ul><li>Keeping expensive shoes that don’t fit </li></ul>Remedy <ul><li>Forget the past – evaluate the future </li></ul><ul><li>Remember: Someone else might benefit from your loss. </li></ul>
  25. 25. <ul><li>Behavioral finance </li></ul>Principle Decision Paralysis Explanation Having a preference for the status quo; avoiding changing or making proactive decisions Example(s) <ul><li>Staying in a low-paying job when a better one could be obtained </li></ul><ul><li>Leaving money in a bank rather than investing </li></ul><ul><li>Neglecting refinancing a mortgage when interest rates drop </li></ul>Remedy <ul><li>ACT </li></ul><ul><li>Autopilot your investments through direct deposit </li></ul>
  26. 26. <ul><li>Behavioral finance </li></ul>Principle Endowment Effect Explanation Tendency to fall in love with what one owns; over-valuing what belongs to an individual relative to the value he or she would place on the same possession or circumstance if it belonged to someone else; tendency to place an inordinately high value on what is &quot;mine&quot; Example(s) <ul><li>It is broken, will not work but belonged to your great, great grandmother </li></ul><ul><li>Memories </li></ul><ul><li>Tend to focus on the positive qualities of the options under consideration </li></ul>Remedy <ul><li>Remember you will make new memories </li></ul>
  27. 27. <ul><li>Sound pedagogy in general </li></ul><ul><ul><li>Self-Efficacy Theory </li></ul></ul><ul><ul><ul><li>Belief that one is capable of performing in a certain manner to attain certain goals </li></ul></ul></ul><ul><ul><ul><ul><li>Focusing on one's assessment of his/her abilities to perform specific tasks in relation to goals and standards rather than in comparison with others’ capabilities . Additionally, it builds on personal past experiences of mastery. </li></ul></ul></ul></ul>
  28. 28. <ul><li>Sound pedagogy in general </li></ul><ul><ul><li>Social Learning Theory </li></ul></ul><ul><ul><ul><li>Ecological model for behavior change </li></ul></ul></ul><ul><ul><ul><ul><li>Focuses attention on both individual and social environmental factors as targets for interventions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Directed at changing … </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>interpersonal, </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>organizational, </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>community, and </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>public policy </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>The theory assumes that appropriate changes in the social environment will produce changes in individuals </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Support of individuals in the population is essential for implementing environmental changes </li></ul></ul></ul></ul>
  29. 29. <ul><li>Characteristics of the educator </li></ul><ul><ul><li>Ability to connect to audience </li></ul></ul><ul><ul><li>Enthusiasm </li></ul></ul><ul><ul><li>Knowledge of content </li></ul></ul><ul><ul><li>Active teaching (demonstrates relevance) </li></ul></ul><ul><ul><li>Pace of instruction </li></ul></ul><ul><ul><li>Clear communication </li></ul></ul><ul><ul><li>Questions effectively </li></ul></ul><ul><ul><li>High expectations </li></ul></ul>