1. Professor SusanThorp
University ofTechnology Sydney
Communicating risk:
Financial literacy and framing

2.  Investment risk for ordinary consumers
 A risk communication study
 Financial literacy matters
 Framing matters
 Regulating risk communication
 Designing for difference
 Testing for consequences

4.  Risk premium adds to savings
 4% premium => 480% growth over 40 years
 Participation adds 2% p.a. to lifetime consumption
 Supports entrepreneurship and growth
 Local participation deepens and secures
capital markets during crises

5. Barriers:
 Costly information gathering
 Transactions costs
 Monitoring costs
Who is excluded:
 Lower cognition
 Lower financial knowledge
 Lower wealth and education
 Poorer health

6. Correct response to knowledge questions
Division
Calculation
of interest
plus
principle
Risk and
return
Definition
of inflation Diversification
Czech
Republic 93% 60% 81% 70% 54%
Germany 84% 64% 79% 87% 60%
Ireland 93% 76% 84% 88% 47%
Malaysia 93% 54% 82% 74% 43%
Peru 90% 40% 69% 86% 51%
Poland 91% 60% 48% 80% 55%
South
Africa 79% 44% 73% 78% 48%
UK 76% 61% 77% 94% 55%
Source: Atkinson and Messy (2012),Table 1, p. 7.

7.  Concerned about consumers’ ‘financial mistakes’
 Concerned about complicated disclosures
 Stipulating content of investment disclosures
 Common elements in fund choice disclosures:
 Type of investment fund
 Objectives
 Risk
 Past performance
 Fees

9.  Participation in risky investments can benefit
individuals and economies
 There are significant barriers to participation
including financial knowledge about risk
 Regulators are aiming for clear and
comparable risk disclosures but prescribed
formats need evaluation

10. Hazel Bateman, Risk andActuarial, UNSW
Christine Eckert, Marketing Group, UTS
John Geweke, Economics, UTS
Jordan Louviere, Institute for Choice, UniSA
Steve Satchell, Cambridge, USyd
SusanThorp, UTS
Acknowledgments: The authors acknowledge financial support under
ARC DP1093842, generous assistance with the development and
implementation of the internet survey from PureProfile and the staff of
the Centre for the Study of Choice, University ofTechnology Sydney; and
excellent research assistance from Rebecca McKibbin, Mariya
Thieviasingham and EdwardWei.

11.  May 2010
 1200 participants
 Online survey
Survey included:
 TASK: Hypothetical investment decision
 Numeracy and financial literacy questions
 Demographics/personal information/expectations

12. Numeracy Half Percentage Fraction Proportion Probability
Correct % 96.1 95.8 91.6 92.9 91.1
Basic
financial
literacy
Numeracy Inflation Time value
of money
Money
illusion
Compound
interest
Correct % 88.4 78.4 55.2 86.8 72.0
Sophisticated
financial
literacy
Risky assets Long period
returns
Volatility Risk
diversification
Correct % 64.3 55.2 76.9 73.4

13.  Three investment options
 Safe (guaranteed bank deposit) (S)
 Risky (growth account) (R)
 Mixed (50:50 bank and growth) (M)
People ranked these from best to worst in
different settings.

14. Annual rates of return Volatility
Level Safe Risky Mixed Risky Mixed
1 2% 4.5% 3.25% 12% 6%
2 2% 4.5% 3.25% 16% 8%
3 2% 4.5% 3.25% 20% 10%
4 2% 4.5% 3.25% 28% 14%
 Returns are constant
 Risk information varies by
 Risk presentation (format): see 3 different formats
 Underlying returns volatility: see 4 volatility levels

15. We trialled many different risk presentations.
Compare results for two:
Range of returns
 There is a 9 in 10 chance of a return between
-19.5% and 32.5%.
Frequency relative to zero (preferred by
regulator)
 On average, negative returns occur 8 years
in every 20.
Bateman, H, C. Ebling, J.Geweke, J. Louviere, S. Satchell, and S.Thorp, 2013 'Financial
competence, risk presentation and retirement portfolio preferences’, Journal of Pension
Economics and Finance, 13(1), 27-61.

16. Features of Options Option A [S] Option B [M] Option C [R]
Option type 100% Bank account
50% Bank account &
50% Growth assets
100% Growth
assets
Annual rate of return (above
inflation)
2% 3.25% 4.5%
Level of investment risk No risk
There is a 9 in 10
chance of a return
between -6% and
14%
There is a 9 in 10
chance of a return
between -14% and
25.5%
For example: Risk presentation format 1 (risk level 1: volatility 12%)
If these superannuation options above were available for you to invest your money today
1. Which one of the three would you be most likely to choose?
o OptionA
o Option B
o Option C
2. Which one of the three would you be least likely to choose?
o OptionA
o Option B
o Option C

17. Features of Options Option A [S] Option B [M] Option C [R]
Option type 100% Bank account
50% Bank account &
50% Growth assets
100% Growth
assets
Annual rate of return (above
inflation)
2% 3.25% 4.5%
Level of investment risk No risk
There is a 9 in 10
chance of a return
between -9% and
17.5%
There is a 9 in 10
chance of a return
between -19.5%
and 32.5%
For example: Risk presentation format 1 (risk level 2: volatility 16%)
If these superannuation options above were available for you to invest your money today
1. Which one of the three would you be most likely to choose?
o OptionA
o Option B
o Option C
2. Which one of the three would you be least likely to choose?
o OptionA
o Option B
o Option C

18. Features of Options Option A [S] Option B [M] Option C [R]
Option type 100% Bank account
50% Bank account &
50% Growth assets
100% Growth
assets
Annual rate of return (above
inflation)
2% 3.25% 4.5%
Level of investment risk No risk
There is a 9 in 10
chance of a return
between -11.5% and
21%
There is a 9 in 10
chance of a return
between -25% and
40%
For example: Risk presentation format 1 (risk level 3: volatility 20%)
If these superannuation options above were available for you to invest your money today
1. Which one of the three would you be most likely to choose?
o OptionA
o Option B
o Option C
2. Which one of the three would you be least likely to choose?
o OptionA
o Option B
o Option C

19. Features of Options Option A [S] Option B [M] Option C [R]
Option type 100% Bank account
50% Bank account &
50% Growth assets
100% Growth
assets
Annual rate of return (above
inflation)
2% 3.25% 4.5%
Level of investment risk No risk
There is a 9 in 10
chance of a return
between -16.5% and
29%
There is a 9 in 10
chance of a return
between -34.5%
and 55.5%
For example: Risk presentation format 1 (risk level 4: volatility 28%)
If these superannuation options above were available for you to invest your money today
1. Which one of the three would you be most likely to choose?
o OptionA
o Option B
o Option C
2. Which one of the three would you be least likely to choose?
o OptionA
o Option B
o Option C

20.  Rankings of safe, mixed and risky can show
confusion.
1. Risk averse people should never rank the Mixed
investment as ‘least preferred’.
2. People who recognise increasing volatility
should never choose Safe at low risk and Mixed
or Risky at high risk.

21. Risk as range Risk as frequency
of negative return
Presentation Presentation
1 0.15 6 0.31
Fraction of people ranking 50:50 investment as worst:
Presentation 1: 15% of respondents rank M worst
Proportions of mistakes higher for frequency formats

22. Fraction of people switching from safe to riskier as
volatility increases:
Risk as range Risk as frequency
of negative return
Presentation Presentation
1 0.29 6 0.36

23. Financial Literacy:
 Probability of first mistake is 5% for respondent
with numeracy in top decile, 35% for numeracy in
bottom decile
 Similar results for financial literacy
Age:
 Probability of first mistake is 15% for age 55+,
38% for age 18-34.

24. 100%
safe
50/50 100%
risky
There is a 9 in 10 chance of a
return between x and y
27 51 22
On average, negative returns
occur z years in every 20
22 44 33

25. growth
50:50
bank
probabiity
Numeracy quantile
0.0
0.2
0.4
0.6
0.8
1.0
0.0 0.2 0.4 0.6 0.8
0.0
0.2
0.4
0.6
0.8
1.0
0.0 0.2 0.4 0.6 0.8
0.0
0.2
0.4
0.6
0.8
1.0
0.0 0.2 0.4 0.6 0.8
0.0
0.2
0.4
0.6
0.8
1.0
0.0 0.2 0.4 0.6 0.8
Lowest risk Highest risk
rangefrequency

26. growth
50:50
bank
probabiity
Numeracy quantile
Lowest risk Highest risk
rangefrequency
0.0
0.2
0.4
0.6
0.8
1.0
0.0 0.2 0.4 0.6 0.8
0.0
0.2
0.4
0.6
0.8
1.0
0.0 0.2 0.4 0.6 0.8
0.0
0.2
0.4
0.6
0.8
1.0
0.0 0.2 0.4 0.6 0.8
0.0
0.2
0.4
0.6
0.8
1.0
0.0 0.2 0.4 0.6 0.8

27. Compare a change in risk with a change in risk
format:
 Format is likely range of returns; Risk level 12%
 Median respondent chooses: S 3%, M 82%, R 15%
 Raise risk to 28%; keep format fixed
 Median respondent chooses: S 6%, M 85%, R 9%
 Keep risk fixed at the 12% but switch to
frequency format
 Median respondent chooses: S 21%, M 61%, R 18%

28.  Influence of format changes are strong for
 different ages
 different account balances
 weakened slightly by higher financial literacy
 People show risk aversion on average, but
 Less as financial literacy declines
 People with poor financial literacy are insensitive
 Will not switch to higher yielding portfolio even if
investment risk declines sharply

29.  Risk communication modes matter to
investment choices
 Range information related to better choices
than negative returns information
 Consumers demonstrate risk aversion
 Higher financial literacy is related to fewer
mistakes, and more risk sensitivity
 Higher financial literacy does not eliminate
presentation effects.

31.  Stipulated risk presentation performed
poorly
 Further testing showed that it is not well
understood
 Unintended consequences of presentation
choice are large

32.  Complexity can lead to ad hoc diversification
and reliance on defaults
 Non-salient information can tilt decisions
 More choice is not always better

33.  Testing should go further than assessing
comprehension
 Clarity and comparability are necessary but
not sufficient
 Need to understand the impact of disclosures
on BEHAVIOUR
 Testing in context and with large groups is
better

34. • Numeracy
• Cognition
• Attitudes
Moderates
• Financial literacy
• Experience
• Specific information
Facilitates • Consumer
expertise
• Skilful decisions
Welfare

35.  Improvements in financial inclusion depend
on education AND information
 Numeracy fundamental to improving
individual financial decision making
 First-order effects of communication
CANNOT be assumed
 Testing across range of abilities required