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Ciclo Conferencias Fundación Ramón Areces January 16, 2014. Financial Literacy: Evidence a cross Countries. Annamaria Lusardi George Washington School of Business Academic Director: Global Financial Literacy Excellence Center (GFLEC). The growing importance of financial literacy. - PowerPoint PPT Presentation
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Annamaria LusardiGeorge Washington School of BusinessAcademic Director: Global Financial Literacy Excellence Center (GFLEC)
Financial Literacy: Evidence across Countries
Ciclo Conferencias Fundación Ramón Areces January 16, 2014
The growing importance of financial literacy
Major changes that increase individuals’ responsibility for their financial well-being
Changes in the pension landscape• More individual accounts and DC pensions
Changes in labor markets• Divergence in wages – skills are critical• More flexibility – pensions have to be portable
Changes in financial markets
• Greater complexity• More opportunities to borrow & in large amounts
A new economic landscape
Increase in individual responsibility
Individuals are in charge of deciding• How much to contribute to retirement accounts• How much and when to invest in education
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 and so are financial products • Many more financial products than in the past
You are your own CFO
Because individuals are in charge
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?
Some questions
How well equipped are people?
Aim: Assess knowledge of basic concepts, the abc’s of personal finance
The journey of three simple questions Added to 5 national surveys in the United States Added to national surveys in more than 20
countries
Do individuals know the basic concepts that are key to making financial decisions?
Measuring financial literacy (I)
“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?”
i) More than $102 ii) Exactly $102iii) Less than $102 iv) Don’t knowv) Refuse to answer
To test numeracy and understanding of interest rates, we asked:
Measuring financial literacy (II)
“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…”
i) More than today ii) Exactly the same as todayiii) Less than todayiv) Don`t knowv) Refuse to answer
To test understanding of inflation, we asked:
Measuring financial literacy (III)
“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.”
i) Trueii) Falseiii) Don`t knowiv) Refuse to answer
Finally, to test understanding of risk diversification, we asked:
Financial Literacy around the World (FLat World)
First set of countries:
USAThe NetherlandsGermany ItalyRussiaSwedenNew ZealandJapan
Special issue of JPEF, October 2011
• Financial Literacy around the World (FLat World)
• We published a paper for each participating country
Financial Literacy around the World(FLat World)
Second set of countries:
FranceSwitzerlandAustraliaRomania
Published in Numeracy, July 2013
The Central Bank of Austria has collected data on 10 Central & Eastern European countries (next project)
Data for the United States
It includes 3 surveys:
1. National Survey: Nationally projectable telephone survey of 1,488 American adults
2. State-by-State Survey: Online survey of approximately 28,000 respondents (roughly 500 per state + DC)
3. Military Survey: Online survey of 800 military personnel and spouses
Data collection is an important step in a national financial literacy strategy
The 2009 National Financial Capability Study
Distribution of Responses to Financial Literacy Questions (%)
NB: Only 30% correctly answered all three 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 FINRA National Survey)
Distribution of Responses to Financial Literacy Questions (%)
NB: About half (53%) correctly answered all three questions; 72% got the first two questions right.
Responses
Correct Incorrect DK RefuseInterest rate 82% 7% 11% 0%
Inflation 78% 5% 17% 0%
Risk diversif. 62% 6% 32% 0%
How much do Germans know?
Distribution of responses across the German population (2009 SAVE)
Distribution of Responses to Financial Literacy Questions (%)
NB: Less than half (45%) correctly answered all three questions; 73% got the first two questions right.
Responses
Correct Incorrect DK RefuseInterest rate 85% 5% 9% 1%
Inflation 77% 8% 14% 1%
Risk diversif. 52% 13% 33% 2%
How much do Dutch know?
Distribution of responses across the Dutch population (2010 DNB Household Survey)
Distribution of Responses to Financial Literacy Questions (%)
NB: Only 27% correctly answered all three questions; less than half (49%) got the first two questions right.
Responses
Correct Incorrect DK RefuseInterest rate 71% 15% 13% 1%
Inflation 59% 11% 28% 2%
Risk diversif. 40% 3% 56% 1%
How much do Japanese know?
Distribution of responses in the Japanese population (2010 SLPS)
Findings: The world is flat
Financial illiteracy is widespread in the population• Less than half of the population in many countries can
answer three basic questions
Risk diversification is most difficult concept• Similar pattern of response across countries• Prevalence of “do not know” answers
Some groups are less likely to answer correctly• Similar pattern of response across countries
Similar patterns across countries
FLat World
Financial literacy is lowest among Young Older Women
Women answer in the same way across countries; they say they “do not know”
Similar patterns across countries
Financial Lit. & Gender: U.S. Data (HRS, age: 50+)
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
Male 74.70% 82.20% 59.30%
Female 61.90% 70.50% 47.50%
Compound Interest Inflation Stock risk
Interest Rate Inflation Risk Diversification0%
10%
20%
30%
40%
50%
60%
70%
80%
90%82%
60%53%
77%
48%
40%
Male Female
Financial literacy and gender (age 23-28, USA)
Interest Rate Inflation Risk Diversification0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
4%
11%
29%
8%
20%
47%
Male Female
“Do not know” responses by gender (age 23-28, USA)
“Do not know” responses
Women are disproportionately more likely to say “I do not know”
Strikingly similar across countries It holds across age groups
New project assessing whether it is lack of knowledge, confidence, or something else
Similar patterns across countries
Looking closely at differences among population sub-groups
The Maori population in New Zealand
Financial Literacy and Age: Germany
Financial Literacy among the Old: US Data
Com
poun
d I..
.
Infla
tion
Sto
ck R
isk0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
Financial literacy matters for financial behavior
Debt and debt management
Investments
Planning and wealth accumulation
Financial literacy and mortgages
Those with low literacy are more likely to be delinquent and default on subprime mortgages
Those with low educational attainment are less likely to refinance mortgages during a period of falling interest rates
Source: Campbell (2006), Gerardi et al. (2013)
From research to applications
In schools• Easier to reach the young• Need a base on which to build
In the workplace
• Easier to reach the adults• Growing importance of retirement
accounts
In libraries, local communities, museums• Where people go to learn
Ideal venues for financial education
Are students well prepared for future challenges? Can they analyze, reason and communicate effectively? Do they have the capacity to continue learning throughout life?
Every three years the OECD Programme for International Student Assessment (PISA) answers these questions and more. It assesses to what extent students near the end of compulsory education have acquired some of the knowledge and skills essential for full participation in society.
OECD’s Programme for International Student Assessment (PISA). Financial literacy added in 2012
Modules developed with a team of mathematicians at Dartmouth College
New course in personal finance
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 textbook on personal finance
• Joint with a mathematician
A new course at GWSB
Start early: Teaching with Elmo
Elmo and Beth Kobliner (member of President’s Advisory Council on Financial Capability)
Reaching adults
Reaching the young at school and the adults at work Most of the adult population is at work
• A potentially effective way to do financial education
Workers have to make financial decisions at work
• Financial and health benefits
Thinking about well-being in a holistic way
• Financial fitness in addition to health and physical fitness. Exercises for financial fitness.
The importance of workplace education
Addressing financial illiteracy & gender differences
The Dartmouth Project
Simplify financial decisions Provide information at
teachable moments Target specific groups Use communication that
does not rely on figures and numbers
Financial Fitness Toolkit at NYSE
Thinking outside the box: Financial literacy games
Celebrity Calamity
Bite Nightclub
A museum of savings in Turin, Italy
A Museum of Saving in Italy
A Museum of Saving in Italy
An International Federation of Finance Museums
The Financial Literacy Programme
Bringing together an international teamThe United StatesThe NetherlandsSpainPortugalSwitzerlandItalySwedenGermanyTurkey
The Financial Literacy Programme is a collaboration among 9 research institutions in the US and Europe and is supported by the European Investment Bank
What a federation of museums can do
Be an advocate for financial literacy for the young• Organize a financial literacy academy or a financial literacy
competition
Be an ambassador for the work of PISA
• Can rely on rigorous data and tests
Provide an opportunity to learn
• Visitors go to museums to explore and learn
Support and promote financial literacy
Concluding remarks
Financial literacy is like reading and writing• It is an essential skill for the 21st century
It is essential for full participation in society• Citizens are asked to vote on economic reforms
It is a global issue• Everyone is affected by it
The importance of financial literacy
Final thought
Derek Bok (Former President of Harvard)
“If you think education is expensive,try ignorance”
Contact and sources of information
Annamaria LusardiGlobal Financial Literacy Excellence Center (GFLEC)E-mail: [email protected]: http://annalusardi.blogspot.com/Twitter: @A_Lusardi
FinLit Talks: http://www.gflec.org/Financial Literacy Seminar Series: http://business.gwu.edu/flss/