financial literacy: evidence a cross countries

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+)

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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%

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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

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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: alusardi@gwu.eduBlog: http://annalusardi.blogspot.com/Twitter: @A_Lusardi

FinLit Talks: http://www.gflec.org/Financial Literacy Seminar Series: http://business.gwu.edu/flss/