This document discusses key questions and findings from research on financial literacy and education. It examines how financial literacy varies over the life cycle, whether individuals can influence their financial knowledge, and if financial knowledge spreads socially. Regarding financial education, it explores whether programs are effective, long-lasting, and cost-efficient compared to alternatives like default options. While some studies find financial education programs improve financial outcomes, others argue the costs may outweigh benefits and alternatives could be more effective ways to help consumers make financial decisions. Overall, the document analyzes what research says about improving financial decision-making through literacy and education initiatives.
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Financial Literacy Research Highlights Policy-Relevant Lessons
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FINANCIAL LITERACY:
SOME POLICY-RELEVANT LESSONS
FROM RESEARCH
Michael Haliassos
Goethe University Frankfurt, NETSPAR, CEPR
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Key questions
■ Financial literacy/knowledge versus financial education
■ Which financial behavior and outcomes are linked?
■ Financial literacy/knowledge:
– How does it vary over the life cycle?
– Can an individual influence its evolution?
– Can it be transmitted to others (social multiplier)?
■ Financial education:
– Does it work?
– Does it last?
– Is it cost effective compared to alternatives?
■ Alternatives or complements?
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Key questions
■ Financial literacy/knowledge versus financial education
■ Which financial behavior and outcomes are linked?
■ Financial literacy/knowledge:
– How does it vary over the life cycle?
– Can an individual influence its evolution?
– Can it be transmitted to others (social multiplier)?
■ Financial education:
– Does it work?
– Does it last?
– Is it cost effective compared to alternatives?
■ Alternatives or complements?
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Key questions
■ Financial literacy/knowledge versus financial education
■ Which financial behavior and outcomes are linked?
■ Financial literacy/knowledge:
– How does it vary over the life cycle?
– Can an individual influence its evolution?
– Can it be transmitted to others (social multiplier)?
■ Financial education:
– Does it work?
– Does it last?
– Is it cost effective compared to alternatives?
■ Alternatives or complements?
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Links to many kinds of behavior
■ Papers have found that greater financial literacy is associated with:
– greater tendency to save for retirement (Lusardi and Mitchell, 2007)
– higher wealth level (Behrman et al, 2011; van Rooij et al., 2012;
Jappelli and Padula, 2013)
– greater tendency to participate in the stock market (van Rooij et al.,
2011)
– more limited tendency to use high-cost credit (Disney and
Gathergood, 2013)
– greater tendency to build diversified portfolios (von Gaudecker, 2015)
– having a lower mortgage when young (Gathergood and Weber, 2017)
– being less likely to report diminished spending capacity and limited
available savings following a financial crisis (Klapper, Lusardi, and
Panos, 2013).
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Key econometric challenges
■ Reverse causality: it is the use of financial products that raises
financial literacy
■ Unobserved heterogeneity: unobserved factors cause people to
be both financially literate and to save for retirement
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Key questions
■ Financial literacy/knowledge versus financial education
■ Which financial behavior and outcomes are linked?
■ Financial literacy/knowledge:
– How does it vary over the life cycle?
– Can an individual influence its evolution?
– Can it be transmitted to others (social multiplier)?
■ Financial education:
– Does it work?
– Does it last?
– Is it cost effective compared to alternatives?
■ Alternatives or complements?
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Financial Sophistication over the Life Cycle
Agarwal, Driscoll, Gabaix, Laibson (2009)
■ Performance tends to rise and then fall with age.
– Baseball players peak in their late 20s (James 2003)
– Mathematicians, theoretical physicists, and lyric poets make
their most important contributions around age 30 (Simonton
1988).
– Chess players achieve their highest ranking in their mid-30s
(Charness and Bosnian 1990).
– Autocratic rulers are maximally effective in their early 40s
(Simonton 1988).
– Authors write their most influential novels around age 50
(Simonton 1988).
■ Personal financial decision making:
– Many financial products are complex
– True costs of financial services not always easily calculated.
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■ They study:
– interest rates in six different markets: mortgages, home equity
loans, home equity credit lines, auto loans, personal credit cards,
and small business credit cards
– Failure to exploit balance transfer credit card offers
– Less likely to learn from paying three kinds of credit card fees:
late payment fees, cash advance fees, and over limit fees
■ Finding: hump-shaped pattern of financial sophistication,
with a peak at 53.
■ Age effects provide one parsimonious explanation for the
hump-shaped pattern of financial sophistication:
– Combination of analytic ability and experiential knowledge.
■ Cohort effects may also play a role, at older ages
Financial Sophistication over the Life Cycle
Agarwal, Driscoll, Gabaix, Laibson (2009)
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Financial sophistication over the Life Cycle
Korniotis and Kumar (2011)
■ Evidence supporting the hypothesis that older investors are
more likely to
– use rules of thumb that reflect greater investment
knowledge
– but exhibit less investment skill because they are less
effective in applying their investment knowledge
■ This tendency is more pronounced among sensitive
demographic groups:
– those with lower educational attainment
– lower income
– minority status
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Key questions
■ Financial literacy/knowledge versus financial education
■ Which financial behavior and outcomes are linked?
■ Financial literacy/knowledge:
– How does it vary over the life cycle?
– Can an individual influence its evolution?
– Can it be transmitted to others (social multiplier)?
■ Financial education:
– Does it work?
– Does it last?
– Is it cost effective compared to alternatives?
■ Alternatives or complements?
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Endogenous acquisition of financial knowledge
§ Lusardi, Michaud, and Mitchell (2017):
– Financial knowledge depreciates over time but can be
augmented through costly acquisition of financial
education
– Financial knowledge is assumed, in the first instance,
to lead to a higher expected return on the risky asset
for an exogenously given amount of return risk.
– Results:
■ 30-40% of US retirement wealth inequality can be attributed
to endogenous financial knowledge,
■ and that imperfect knowledge creates substantial welfare
losses for part of the population.
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Key questions
■ Financial literacy/knowledge versus financial education
■ Which financial behavior and outcomes are linked?
■ Financial literacy/knowledge:
– How does it vary over the life cycle?
– Can an individual influence its evolution?
– Can it be transmitted to others (social multiplier)?
■ Financial education:
– Does it work?
– Does it last?
– Is it cost effective compared to alternatives?
■ Alternatives or complements?
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The social multiplier
■ How many people does financial literacy reach?
■ Recent literature:
– Haliassos, Jansson, and Karabulut (RFS 2020):
■ Being placed next to neighbors with economics or business
education, at least some of which was acquired in college,
significantly increases the probability of participation in
stocks and in individual retirement accounts ten to twenty
years later.
■ This multiplier is not operative when households on the
receiving end do not have sufficient educational attainment
to benefit from the information they receive, or sufficient
exposure to such neighbors. (Gender?)
– Distributional implications
– Andersen, Campbell, Nielsen, and Ramadorai (forthc. AER):
■ having an economics or finance degree or a family member
with an economics or finance degree leads to mortgage
refinancing decisions that are closer to optimal.
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Key questions
■ Financial literacy/knowledge versus financial education
■ Which financial behavior and outcomes are linked?
■ Financial literacy/knowledge:
– How does it vary over the life cycle?
– Can an individual influence its evolution?
– Can it be transmitted to others (social multiplier)?
■ Financial education:
– Does it work?
– Does it last?
– Is it cost effective compared to alternatives?
■ Alternatives or complements?
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Financial education
■ Lusardi and Mitchell (JEL 2014):
– review a variety of programs internationally
■ Alan and Ertac (2018)
– conduct a randomized educational intervention among 3rd and 4th
graders
– the students’ own teachers follow a structured curriculum in order
to encourage patience
– by fostering, through case studies, stories, and in-class games,
the ability to imagine future selves and the consequences of
current actions, so as to promote self control and forward-looking
behavior.
– Students exposed to this program exhibit increased willingness to
defer consumption in incentivized experimental tasks:
■ they require fewer gifts to defer consumption, and they allocate more
consumption to the future when waiting is rewarded.
– Effects persist even after almost 3 years since the intervention
– they extend beyond financial outcomes: less likely to receive a low
behavior grade.
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Financial education
■ Bover, Hospido, and Villanueva (2018):
– study the effects of a 10-hour course delivered in compulsory
secondary education in Spain
– Course: on budgeting, banking relationship and saving vehicles,
and awareness about future outcomes.
– Authors conduct a randomized field experiment among 9th
graders
■ Performance in standardized tests of financial knowledge increased
by 16% of one standard deviation
■ Treated students were more likely to become involved in financial
matters at home
■ showed a higher degree of patience in hypothetical saving choices
■ exhibited greater patience than a control group, at various maturities
and interest rates, in an incentivized saving task conducted three
months after completion of the course
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Key questions
■ Financial literacy/knowledge versus financial education
■ Which financial behavior and outcomes are linked?
■ Financial literacy/knowledge:
– How does it vary over the life cycle?
– Can an individual influence its evolution?
– Can it be transmitted to others (social multiplier)?
■ Financial education:
– Does it work?
– Does it last?
– Is it cost effective compared to alternatives?
■ Alternatives or complements?
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Financial education: more skeptical
Willis (2011)
■ Willis (2011) has challenged the case on the basis of:
– the costs a large-scale, mandatory program would entail
– the loss in autonomy and privacy that individuals would suffer in
a process of debiasing
– the cost effectiveness of alternative approaches, such as default
options and regulation of financial advisor incentives.
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Key questions
■ Financial literacy/knowledge versus financial education
■ Which financial behavior and outcomes are linked?
■ Financial literacy/knowledge:
– How does it vary over the life cycle?
– Can an individual influence its evolution?
– Can it be transmitted to others (social multiplier)?
■ Financial education:
– Does it work?
– Does it last?
– Is it cost effective compared to alternatives?
■ Alternatives or complements?
– Financial advice
– Default options and simpler products
– Marketing of financial products
– Regulation of advisors and producers
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Linking individual biases to industry practices
and to the institutional environment
■ Understanding the interplay of
– behavioral biases
– product complexity
– product differentiation
– different institutional (country) contexts
will be important for shaping an adequate regulatory and policy
response in the future.
■ Example:
– Customers fail to optimize their credit card behavior to
differences in credit card interest rates and other terms
– Do credit card providers take advantage of this failure?
– “Shrouding”: Make undesirable features of the credit card
contract less obvious to customers
■ Theory: shrouding equilibria in the presence of
unsophisticated households (Gabaix and Laibson, 2006).
■ Evidence: Ru and Schoar (2017):
– credit card companies target less sophisticated
customers with more back-loaded and hidden fees
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Key questions
■ Financial literacy/knowledge versus financial education
■ Which financial behavior and outcomes are linked?
■ Financial literacy/knowledge:
– How does it vary over the life cycle?
– Can an individual influence its evolution?
– Can it be transmitted to others (social multiplier)?
■ Financial education:
– Does it work?
– Does it last?
– Is it cost effective compared to alternatives?
■ Alternatives or complements?
■ For more on household finance research:
– Gomes, Haliassos, Ramadorai (2020), Household Finance,
forthcoming in the Journal of Economic Literature
■ Downloadable from my web site:
https://sites.google.com/view/michaelhaliassos/home
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