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Financial Literacy: Evidence a cross Countries

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.

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Financial Literacy: Evidence a cross Countries

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  1. Ciclo Conferencias Fundación Ramón Areces January 16, 2014 Financial Literacy: Evidence across Countries Annamaria LusardiGeorge Washington School of Business Academic Director: Global Financial Literacy Excellence Center (GFLEC)

  2. The growing importance of financial literacy A new economic landscape • 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

  3. Increase in individual responsibility You are your own CFO • 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

  4. Because individuals are in charge Some questions • How well-equipped are people to make financial decisions? • Are there vulnerable groups? • Does financial literacy matter? • What can be done to promote financial literacy?

  5. How well equipped are people? Do individuals know the basic concepts that are key to making financial decisions? • 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

  6. Measuring financial literacy (I) To test numeracy and understanding of interest rates, we asked: • “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 $102 iii) Less than $102 iv) Don’t know v) Refuse to answer

  7. Measuring financial literacy (II) To test understanding of inflation, we asked: • “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 today iii) Less than today iv) Don`t know v) Refuse to answer

  8. Measuring financial literacy (III) Finally, to test understanding of risk diversification, we asked: • “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) True ii) False iii) Don`t know iv) Refuse to answer

  9. Financial Literacy around the World (FLat World) First set of countries: • USA • The Netherlands • Germany • Italy • Russia • Sweden • New Zealand • Japan

  10. Financial Literacy around the World (FLat World) We published a paper for each participating country Special issue of JPEF, October 2011

  11. Financial Literacy around the World (FLat World) Second set of countries: • France • Switzerland • Australia • Romania • Published in Numeracy, July 2013 • The Central Bank of Austria has collected data on 10 Central & Eastern European countries (next project)

  12. Data for the United States The 2009 National Financial Capability Study • It includes 3 surveys: • National Survey: Nationally projectable telephone survey of 1,488 American adults • State-by-State Survey: Online survey of approximately 28,000 respondents (roughly 500 per state + DC) • Military Survey: Online survey of 800 military personnel and spouses • Data collection is an important step in a national financial literacy strategy

  13. 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: Only30%correctly answered all three questions; less than half (46%)got the first two questions right.

  14. How much do Germans know? Distribution of responses across the German population (2009 SAVE) Distribution of Responses to Financial Literacy Questions (%) NB: About half(53%)correctly answered all three questions; 72%got the first two questions right.

  15. How much do Dutch know? Distribution of responses across the Dutch population (2010 DNB Household Survey) Distribution of Responses to Financial Literacy Questions (%) NB: Less than half(45%)correctly answered all three questions; 73%got the first two questions right.

  16. How much do Japanese know? Distribution of responses in the Japanese population (2010 SLPS) 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.

  17. 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

  18. 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

  19. Financial Lit. & Gender: U.S. Data (HRS, age: 50+)

  20. Financial literacy and gender (age 23-28, USA)

  21. “Do not know” responses by gender (age 23-28, USA)

  22. “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

  23. Looking closely at differences among population sub-groups The Maori population in New Zealand

  24. Financial Literacy and Age: Germany

  25. Financial Literacy among the Old: US Data

  26. Financial literacy matters for financial behavior Debt and debt management Investments Planning and wealth accumulation

  27. 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)

  28. From research to applications Ideal venues for financial education • 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

  29. OECD’s Programme for International Student Assessment (PISA). Financial literacy added in 2012 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.

  30. Modules developed with a team of mathematicians at Dartmouth College

  31. New course in personal finance A new course at GWSB • 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

  32. Start early: Teaching with Elmo Elmo and Beth Kobliner (member of President’s Advisory Council on Financial Capability)

  33. Reaching adults The importance of workplace education • 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.

  34. 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

  35. Financial Fitness Toolkit at NYSE

  36. Thinking outside the box: Financial literacy games • Celebrity Calamity • Bite Nightclub

  37. A museum of savings in Turin, Italy

  38. A Museum of Saving in Italy

  39. A Museum of Saving in Italy

  40. An International Federation of Finance Museums

  41. The Financial Literacy Programme Bringing together an international team The United States The Netherlands Spain Portugal Switzerland Italy Sweden Germany Turkey The Financial Literacy Programme is a collaboration among 9 research institutions in the US and Europe and is supported by the European Investment Bank

  42. What a federation of museums can do Support and promote financial literacy • 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

  43. Concluding remarks The importance of financial literacy • Financial literacy is like reading and writing • It is an essential skillfor the 21st century • It is essential for fullparticipation in society • Citizens are asked to vote on economic reforms • It is a global issue • Everyone is affected by it

  44. Final thought “If you think education is expensive, try ignorance” Derek Bok (Former President of Harvard)

  45. Contact and sources of information Annamaria Lusardi Global Financial Literacy Excellence Center (GFLEC) E-mail: alusardi@gwu.edu Blog: http://annalusardi.blogspot.com/ Twitter: @A_Lusardi FinLitTalks: http://www.gflec.org/ Financial Literacy Seminar Series:http://business.gwu.edu/flss/

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