Headline. Financial Literacy, Financial Education, and Downstream Financial Behaviors. Daniel Fernandes. Aflatoun Nov. 18, 2014

Transcription

1 Headline Financial Literacy, Financial Education, and Downstream Financial Behaviors Daniel Fernandes Aflatoun Nov. 18, 2014

2 A More Dangerous Financial World Consumers financial world was more forgiving a generation ago White (2009) states that from 1980 to 2005: 5 times more bankruptcies; Mortgage Debt / Income up by factor of 3; Consumer Debt / Income up by factor of 4.5; Fringe banking services for the indebted have exploded: payday loans, debt consolidation loans Move from defined benefit to defined contribution retirement plans 2

3 Financial Literacy as Protection Australia: 2004 National Consumer & Financial Literacy taskforce; 2008 Australian Securities and Investments Commission. Bank of Indonesia: Second OECD Asian Roundtable on the Role of Central Banks in financial literacy Israel Prime Minister's Office - Division of the Status of Women chooses Economic Empowerment of Women to lead financial literacy courses in 29 localities throughout Israel 3

4 Billions Spent on Financial Education Worldwide Cost data very hard to come by, but we estimate annual expenditures in $Billions Government US Federal Spending $124 Million in 2010 State Spending e.g., required high school class in Virginia $187 Mil / Yr Industry NGOs 4

5 Financial Literacy as Objective Knowledge Financial literacy: specialized kind of consumer expertise pertaining to how one manages one s financial affairs (Jump$tart Coalition 2007) Brucks (1985) distinguished: objective knowledge amount, type, and organization of what is stored in memory subjective knowledge -- what consumers think they know; familiarity and feeling of knowing Existing measures of financial literacy are based on % correct on objective knowledge tests. Each question has a right answer. 5

6 Financial Literacy as Antecedent to Financial Behaviors Antecedent to a set of healthy financial behaviors (Jump$tart Coalition 2007) Implicit model: Education Gains in Financial Knowledge Delayed Retrieval and Application of Knowledge at time of financial decisions months and years later cf. Thompson, Gentner, Loewenstein 6

7 Linked in Prior Research Cash flow management (Hogarth, Hilgert, and Schuchardt 2002; Klapper, Lusardi, and Panos 2011) Absence of debt (Lusardi and Tufano 2008; Clark, Ambrosio, McDermed, and Sawant 2006) Saving (Mandell and Klein 2009; Danes, Huddleston-Casas, and Boyce, 1999) Planning for retirement (Lusardi and Mitchell, 2006a, 2006b, 2007; Loibl and Hira, 1999) Activity in retirement plans (Duflo and Saez 2003). Propensity to own stocks (Elliehausen, Lindquist, and Staten 2002; Lyons, Chang and Scherpf 2006) Investment decisions (Cole and Shastry 2010; Kimball and Shumway 2006) 7

8 Meta-Analysis: Coded 201 Studies For Effect size of financial literacy on financial behavior: r(financial literacy, financial behavior) Financial Behavior type: saving; planning for retirement; absence of debt; stock ownership and investment decisions; cash flow management; activity in retirement plans; and financial inertia such as choice of default options and payment of unnecessary fees. Low income sample or general population sample From Fernandes, Lynch, & Netemeyer (2014, Management Science)

9 Why Meta-Analysis? Typical systematic research synthesis via metaanalysis Makes explicit the rules for inclusion and exclusion of studies Explicit coding procedures to characterize similarities and differences among studies studying roughly the same independent variable to dependent variable relationships Key statistic used to summarize the findings is an effect size that varies continuously 9

10 Our Guiding Hypothesis There are two kinds of studies in this literature 1. Experimental & Quasi-Experimental studies of effects of educational interventions on financial behaviors 2. Correlational / econometric studies that measure financial literacy of consumers by some test & predict some downstream financial behavior We expect that first kind will show weak effects compared to second kind 10

11 Interventions Explain about 0.1% of Variance in Financial Behaviors inverse of the standard error of the effect-size Studies with measured fin. lit. Studies with manipulated fin. lit Effect-size 11

12 Effects Much Larger for Measured than Manipulated Financial Literacy Effect-size r 0.3 Sample-Weighted Average partial r(financial literacy, financial behavior) and 95% Confidence Interval manipulated financial literacy measured financial literacy Save Plan Debt Cash Flow Invest Plan Active Inertia From Fernandes, Lynch, & Netemeyer (2014, Management Science)

13 Smaller Effect Sizes with More Rigorous Designs Sample-Weighted Average r(financial literacy, financial behavior) and 95% Confidence Interval Manipulated Financial Literacy, Randomized Experiment (O = 15, N = 23422) Manipulated Financial Literacy, Pre-Post or Quasi- Experiment (O = 75, N = ) Measured Financial Literacy, Instrumental Variables Used (O = 24, N = 84982) From Fernandes, Lynch, & Netemeyer (2014, Management Science) Measured Financial Literacy, OLS Regression Used (O = 87, N = )

14 Interventions Decay: The Case for Just-in-time Financial Education 0.2 Number of hours at the intervention 24 hours of intervention Effect-size r hours of intervention 12 hours of intervention 6 hours of intervention 1 hour of intervention Significance marker Number of months after the intervention After a delay, even long interventions have no significant influence From Fernandes, Lynch, & Netemeyer (2014, Management Science)

15 Our 3 Own Empirical Studies A 13-item FL scale tapping the content domains of savings/investments, personal finance, and debt/borrowing showed evidence of unidimensionality, internal consistency and nomological validity: numeracy (r=.59) confidence in info. search / investing (r=.31) propensity to plan for money short-term (r=.11) preference for numerical information (r=.39) attitude toward/concern for money (r=.27) NFC (r=.29) negatively related to being a spendthrift (r=-.17) 15

16 13-Item Financial Literacy Measure 1) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy: more than today with the money in this account (1) exactly the same as today with the money in this account (2) less than today with the money in this account (3) Don't know (4) Refuse to answer (5) 2) Do you think that the following statement is true or false? Bonds are normally riskier than stocks. True (1) False (2) Don't know (3) Refuse to answer (4) 3) Considering a long time period (for example 10 or 20 years), which asset described below normally gives the highest return? savings accounts (1) stocks (2) bonds (3) Don't know (4) Refuse to answer (5) 16

17 13-Item Financial Literacy Measure 4) Normally, which asset described below displays the highest fluctuations over time? savings accounts (1) stocks (2) bonds (3) Don't know (4) Refuse to answer (5) 5) When an investor spreads his money among different assets, does the risk of losing a lot of money: increase (1) decrease (2) stay the same (3) Don't know (4) Refuse to answer (5) 6) Do you think that the following statement is true or false? If you were to invest $1000 in a stock mutual fund, it would be possible to have less than $1000 when you withdraw your money. True (1) False (2) Don't know (3) Refuse to answer (4) 17

18 13-Item Financial Literacy Measure 7) Do you think that the following statement is true or false? A stock mutual fund combines the money of many investors to buy a variety of stocks. True (1) False (2) Don't know (3) Refuse to answer (4) 8) Do you think that the following statement is true or false? After age 70 1/2, you have to withdraw at least some money from your 401(k) plan or IRA. True (1) False (2) It depends on the type of IRA and/or 401(k) plan (3) Don't know (4) Refuse to answer (5) 18

19 13-Item Financial Literacy Measure 9) Do you think that the following statement is true or false? A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less. True (1) False (2) Don't know (3) Refuse to answer (4) 10) Suppose you had $100 in a savings account and the interest rate is 20% per year and you never withdraw money or interest payments. After 5 years, how much would you have on this account in total? More than $200 (1) Exactly $200 (2) Less than $200 (3) Don't know (4) Refuse to answer (5) 11) Which of the following statements is correct? Once one invests in a mutual fund, one cannot withdraw the money in the first year (1) Mutual funds can invest in several assets, for example invest in both stocks and bonds (2) Mutual funds pay a guaranteed rate of return which depends on their past performance (3) None of the above (4) Don't know (5) Refuse to answer (6) 19

20 13-Item Financial Literacy Measure 12) Which of the following statements is correct? If somebody buys a bond of firm B: He owns a part of firm B (1) He has lent money to firm B (2) He is liable for firm B s debts (3) None of the above (4) Don't know (5) Refuse to answer (6) 13) Suppose you owe $3,000 on your credit card. You pay a minimum payment of $30 each month. At an Annual Percentage Rate of 12% (or 1% per month), how many years would it take to eliminate your credit card debt if you made no additional new charges? less than 5 years (1) between 5 and 10 years (2) between 10 and 15 years (3) never (4) Don't know (5) Refuse to answer (6) 20

21 Our 3 Own Empirical Studies Via hierarchical regression, predict financial behaviors with demographics, financial literacy, and related traits. Financial behavior DVs: 1) a yes or no measure of saving for an emergency fund (Lusardi and Mitchell 2006, 2007, 2009); 2) a yes or no measure of figuring out how much savings is needed for retirement (Lusardi and Mitchell 2006, 2007, 2009); 3) How do you think banks or credit card companies would rate your credit? 1 =Very Poor, 10 = Excellent ; 4) three multiple-choice items used by Mandell and Klein (2009) and Hilgert et al. (2003) assessing negative financial behaviors of: bouncing checks; late credit card payments; and minimal credit card payments. Summed three items for score from 3 to 13. 5) four yes/no questions about performing positive investment / savings behaviors summed to form a score ranging from 0 to 4 (Lusardi and Tufano 2009); 21

22 Our 3 Own Empirical Studies Numeracy linked to better reasoning about debt, wealth accumulation, and managing money (Soll et al. 2011). Propensity to plan money long-term- linked to wealth accumulation (Ameriks et al. 2003); FICO scores (Lynch et al. 2010); financial literacy (Lusardi and Mitchell 2009). Confidence - confidence in one s ability to obtain the right financial info. to make good financial decisions. Willingness to take risks W/O taking some risks (equities investing), there is little chance of wealth accumulation. 22

23 Our 3 Own Empirical Studies For all five financial behavior measures, literacy added significantly to demographics alone When other traits added to the models, significance of financial literacy went away Consumer confidence, Propensity to plan, and Willingness to take risks predicted instead of literacy 23

24 Role of Financial Education in Toolkit Financial Literacy is a better info remedy What s the half-life? Nudges and Just in Time Financial Education? Nudge / defaults when consumers homogeneous JIT Financial education + active choice when needs heterogeneous 2 problems for future work: What to teach When to teach it? How to teach close to the point of decision 24