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Financial Literacy and Economic Outcomes: Evidence and Policy Implications
- 1. Financial Education Roundtable EuropeanMoney Week – March 9, 2015 Annamaria Lusardi The George Washington School of Business Academic Director, Global Financial Literacy Excellence Center (GFLEC) Financial Literacy and Economic Outcomes: Evidence and Policy Implications
- 2. The growing importanceof financial literacy Major changes that increase individuals’ responsibility for their financial well-being Changes in the pension landscape • More individual accounts and private pensions Changes in labor markets • Divergence in wages – skills are critical Changes in financial markets • Greater complexity • More opportunities to borrow & in large amounts A new economic landscape
- 3. Increase in individualresponsibility Individuals make many financial decisions • Investment in education • Financial security after retirement • Investing in financial markets & other markets (buying a home, car, etc.) Not enough to look at asset side; liability side is equally important • Increase in household debt • Debt normally incurs higher interest rates than what is earned on assets Financial decisions are complex • Many more financial products than in the past More complex financial decisions
- 4. A large amountof research in past 15 years 1. How well-equipped are people to make financial decisions? 2. Are there vulnerable groups? 3. Does financial literacy matter? 4. What can be done to promote financial literacy and financial decision-making? Some questions
- 5. Measuring financial literacy 1.“Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?” 2. “Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, with the money in this account, would you be able to buy…” 3. “Do you think the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.” More than $102 Exactly $102 Less than $102 Don’t know Refuse to answer More than today Exactly the same as today Less than today Don`t know Refuse to answer True False Don`t know Refuse to answer
- 6. Financial Literacy aroundthe World (FLat World) Evidence from 13 countries: USA The Netherlands Germany Italy Russia Sweden New Zealand Japan Australia France Switzerland Romania Canada
- 7. European Investment Bank’sFinancial Literacy Programme Bringing together an international team The United States The Netherlands Switzerland Italy Sweden Germany Turkey Spain Portugal The Financial Literacy Programme connects 9 countries and builds an international collaboration on financial education.
- 8. Distribution of Responsesto Financial Literacy Questions (%) NB: Only 30% correctly answer all 3 questions; less than half (46%) got the first two questions right. Responses Correct Incorrect DK Refuse Interest rate 65% 21% 13% 1% Inflation 64% 20% 14% 2% Risk diversif. 52% 13% 34% 1% How much do Americans know? Distribution of responses across the U.S. population (2009 National Financial Capability Survey)
- 9. NB: Less thanhalf (45%) correctly answer all 3 questions; 73% got the first two questions right. Responses Correct Incorrect DK Refuse Interest rate 85% 5% 9% 1% Inflation 77% 8% 14% 1% Risk diversif. 52% 13% 33% 2% How much do the Dutch know? Distribution of responses across the Dutch population (2010 DNB Household Survey)
- 10. FLat World: Strikinglysimilar patterns across countries Financial illiteracy is widespread • Less than half of the population in many countries can answer three basic financial literacy questions Risk diversification is most difficult concept • The majority of individuals lack knowledge of concepts such as risk diversification and do not understand the relationship between risk and return • Similar pattern of response across countries • Prevalence of “do not know” answers • Risk literacy matters for financial decisions
- 11. Who are thevulnerable groups? Who knows the least? • Those with low income/education, immigrants, those living in rural areas, the elderly, the young and women Women have lower financial literacy • Need to look closer at the evidence The young have lower financial literacy • Most data sets have information on respondents age 18 and older. New data is available for 15-year olds.
- 12. Financial knowledge amongwomen Very robust findings of large gender differences in financial knowledge Women are much more likely to say “I do not know” 22% 35% 47% 39%38% 55% 60% 62% 0% 10% 20% 30% 40% 50% 60% 70% US Netherlands Germany Switzerland Financial knowledge by gender (% answering 3 Qs correctly) Women Men 50% 46% 43% 22% 34% 29% 30% 12% 0% 10% 20% 30% 40% 50% 60% 70% US Netherlands Germany Switzerland At least one "don't know" answer, by gender Women Men
- 13. Financial knowledge amongthe young Compared to other age groups, financial knowledge among the young is very low 13% 22% 28% 34% 38% 38% 42% 43% 50% 55% 54% 49% 0% 10% 20% 30% 40% 50% 60% 18-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+ Financial knowledge by age in the United States – 2012 US National Financial Capability Study (% answering 3 questions correctly)
- 14. New data for15-year-olds around the world We have important new data 2012 Programme for International Student Assessment (PISA) Measuring financial literacy among high school students
- 15. Strong performance in financialliteracy Low performance in financial literacy Average performance of 15-year-olds in financial literacy Shanghai-China Flemish Community (Belgium) Estonia Australia New Zealand Czech Republic Poland Latvia United States France Russian FederationSlovenia Spain Croatia Israel Slovak Republic Italy Colombia375 385 395 405 415 425 435 445 455 465 475 485 495 505 515 525 535 545 555 565 575 585 595 605 Mean score
- 16. 625 and above 550 to <625 475to <550 400 to <475 Less than 400 points Financial literacy performance levels Top performers Baseline L1 L2 L3 L4 L5 Distribution of student performance
- 17. Some important findings A lot of the variation in financial literacy is explained by socio-economic background (parent’s income and education) We start unequal when it comes to financial literacy and inequality will only grow How to provide equality of opportunity early in life?
- 18. Relationship between socio-economicstatus and financial literacy, mathematics, and reading performance 0 2 4 6 8 10 12 14 16 18 20 Estonia Italy RussianFederation Croatia Australia Fl.Com.(Belgium) Poland Shanghai-China Colombia Latvia CzechRepublic OECDaverage-13 Israel Spain France Slovenia UnitedStates SlovakRepublic NewZealand Financial literacy Mathematics Reading Percentageofvariationinperformance explainedbysocio-economicstatus
- 19. Why should wecare? Financial knowledge can be linked to behavior: saving, borrowing, investing, and retirement planning Financial knowledge is linked to wealth inequality Our paper shows that 30-40% of wealth inequality can be attributed to financial knowledge
- 20. Implications for financialeducation: What the research suggests Need to improve levels of financial literacy Levels of knowledge are low globally Need for more targeted programs One size does not fit all Women are an ideal group for fin. educ. programs Young have very low financial knowledge in all countries Even in countries with advanced financial markets Very important to provide access to all
- 21. Scalability: Reaching thepopulation In schools • Easier to reach the young In the workplace • Easier to reach the adults In libraries, local communities, museums • Where people go to learn Venues for financial education
- 22. Financial education inschools Financial education in school is critically important: Investment in higher education is one of the most important decisions the young face • Young people need to understand the weight of this decision Need to be financially literate before engaging in financial transactions • It is much cheaper to educate the young Provide an equal opportunity to learn • Without fin educ, the young enter adult life on unequal footing Need to prepare the new generations
- 23. Call to action Needto train the teachers Rigorous curriculum Move the focus from “Is it effective?” to “How do we make this effective?” Make the content relevant and engaging Start early Improving financial education in school
- 24. Call to action Talk to the Ministry of Education We need ambassadors of financial literacy! Make it simple, complexity is a barrier, particularly in the face of widespread financial illiteracy Learn from data and research, continue to experiment Improving financial education overall
- 25. Example 1: A newPersonal Finance Course in college Financial Decision-Making: Implications for the Consumer and the Professional Cover personal finance with a rigorous approach • A quantitative approach to personal finance • Teaching takes into consideration gender differences in fin literacy It incorporates some macro, accounting, and risk management Writing a new textbook on personal finance • Joint with a mathematician and a professional writer
- 26. Example 2: A programfor the young Kept the message free of economic/finance jargon Covered concepts, such as risk diversification, in a simple story After being exposed to videos, the knowledge and financial decision-making improved Five steps to planning success We designed a program for young workers Used videos
- 27. Example 3. Othervenues: A network of Finance Museums
- 28. 28 GFLEC’s global network:Ongoing projects around the world
- 29.
- 30. FinLab: A FinancialInnovation Lab Addressing current needs • Advance understanding of what works in financial education • Integrate financial education and technology • Improve financial education programs’ effectiveness • Customize financial education: one size does not fit all Our Aim: Drive change in financial education by identifying and fostering the strategies and innovations that promise to transform the financial education landscape We have set up a Financial Education Innovation Fund
- 31. Final thoughts Financial literacyis like reading and writing • As it was not possible in the past to participate in society without being able to read and write, so it is not possible to thrive in today’s society without being financially literate Building human capital for the 21st century • Everyone deals with finance and finance is sufficiently complex that we cannot leave it to the individual to learn by himself/herself
- 32. Financial literacy skillsfor the 21st century
- 33. Contact and furtherinformation Annamaria Lusardi Global Financial Literacy Excellence Center (GFLEC) E-mail: [email protected] Webpage: www.gflec.org Blog: http://annalusardi.blogspot.com/ Twitter: @A_Lusardi Facebook: Global Financial Literacy Excellence Center Page