Research: Working Paper Series

Through the G53 Network Working Paper Series, our members can share their research findings and make them available prior to publication in academic journals. In this section, you can find the research that Network members are developing. The aim of the series is to tackle the most pressing questions and to provide rigorous evidence-based research.

Assessing Financial Literacy Among the Young

Luis Oberrauch, Tim Kaiser, and Annamaria Lusardi

Abstract: Since 2012, the Programme for International Student Assessment (PISA), an initiative of the Organisation for Economic Co-operation and Development (OECD), conducted triennial tests to evaluate the financial literacy of 15-year-old students in various countries. These data provide an opportunity to study the determinants of financial literacy among the young and how it evolves over time. This article examines the data collected so far (2012, 2015, 2018), documents stylized facts across waves, and provides guidance on using the test scores estimated from psychometric models.

Financial Literacy and Financial Education: An Overview

Tim Kaiser and Annamaria Lusardi

Abstract: This article provides a concise narrative overview of the rapidly growing empirical literature on financial literacy and financial education. We first discuss stylized facts on the demographic correlates of financial literacy. We next cover the evidence on the effects of financial literacy on financial behaviors and outcomes. Finally, we review the evidence on the causal effects of financial education programs focusing on randomized controlled trial evaluations. The article concludes with perspectives on future research priorities for both financial literacy and financial education.

Selection into Financial Education and Effects on Portfolio Choice

Irina Gemmo, Pierre-Carl Michaud, and Olivia S. Mitchell

Abstract: To examine how financial education affects financial outcomes, one must evaluate whether and how sample selection may bias inferences regarding program impacts. Our incentivized experiment reveals how such selection influences estimated financial education effects. The more financially literate and those expecting higher gains pay more to purchase education, while those who consider themselves very financially literate pay less. Using portfolio allocation tasks, we show that the financial education increases portfolio efficiency and welfare by almost 20 and 3 percentage points, respectively. In our setting, selection does not greatly influence estimated program effects, comparing those participating and those who do not.

Could Financial Education Be a Universal Social Policy? A Simulation of Potential Influences on Inequality Levels

Giovanni Gallo and Alessia Sconti

Abstract: Financial vulnerability is a concern of policymakers around the world. The Covid-19 pandemic elevated the financial fragility of households globally, particularly among the most vulnerable populations, and rising inflation is adding a new strain. This paper looks at Italy in examining how a marginal change in a household’s financial literacy level might affect household income (wealth) inequality levels, both at the mean value and along with the distribution. Using data from the 2016 wave of the Bank of Italy Survey of Households Income and Wealth (SHIW), which includes the Big Three questions that are widely used as a measure of financial literacy, we show a noteworthy shift if financial literacy were improved among as few as 10% of the survey respondents. If one of every 10 Italian who had no correct answers on the financial literacy questions in the survey were replaced with respondents reporting two correct answers out of three, the mean value of the household equivalized disposable income would rise by 0.8%, or €160 per year. If one of every 10 respondents reporting no correct answers were replaced by respondents who could answer all three questions correctly, it would jump by +1.5%, or €285 per year. To achieve the same results through lump sum payments to households would cost Italy as much as €7.3 billion annually. Our preliminary cost analysis supports mandatory financial education in schools. Heterogeneous analysis reveals that an increase in financial literacy levels also can engender a reduction of inequality levels among the most vulnerable groups.

Effectiveness of Employer-Provided Financial Education Programs

Robert L. Clark

Abstract: While there have been numerous studies illustrating the rather low level of financial knowledge of Americans, there have been only a few efforts to examine the effectiveness of employer-provided programs in enhancing financial literacy and the ability of these programs to modify worker retirement and saving decisions. In this paper, I summarize the findings from a series of studies conducted over the past twenty years. All of the studies were done in conjunction with employers. The primary objectives of this research have been to evaluate the effectiveness of onboarding and retirement planning programs and the financial education provided in these programs. In addition, employer nudges to mid-career employees are examined. I describe the impact of financial planning programs on worker knowledge of key financial concepts and their ability to make better decisions concerning saving decisions and the timing of retirement. I also provide recommendations on how to improve the effectiveness of workplace financial education programs.

The Fear of Missing Out on Cryptocurrency and Stock Investments: Direct and Indirect Effects of Financial Literacy and Risk Tolerance

Paul Gerrans, Sherin Babu Abisekaraj, and Zhangxin (Frank) Liu

Abstract: The `Fear of Missing Out’ or FoMO has become an accepted motivator of behaviours extending from the purchase of limited-edition sneaker brands to social media use and cryptocurrency investment. As a motivator of individual financial behaviours, such as cryptocurrency and stock investment, it is unclear how FoMO relates to consumer financial literacy and other consumer traits, including risk tolerance and personality. We propose, and assess, a model of reported investment behaviour and investment behaviour intention. We find a larger association between FoMO and crypto ownership, both current and intended, compared with stocks. FoMO has a small association with current stock ownership, relative to the association of financial literacy and risk tolerance. Context matters when measuring FoMO with the more context specific measures having the largest associations with investment behaviour and investment intentions. Finally, our results suggest financial literacy is an antecedent of FoMO, more so for stocks.

Reverse Mortgages and Financial Literacy

Ismael Choinière Crèvecoeur and Pierre-Carl Michaud

Abstract: Few retirees use reverse mortgages. In this paper, we investigate how financial literacy and prior knowledge of the product influence take-up by conducting a stated-preference experiment. We exogenously manipulate characteristics of reverse mortgages to tease out how consumers value them and investigate differences by financial literacy and prior knowledge of reverse mortgages. We find that those with higher financial knowledge are more likely to know about reverse mortgages, not more likely to purchase them at any cost but are more sensitive to the interest rate and the insurance value of these products in terms of the non-negative equity guarantee.

Financial Education: From Better Personal Finance to Improved Citizenship

Elsa Fornero and Anna Lo Prete

Abstract: Financial education is a crucial determinant of informed decisions, in both the private and social spheres. From a life cycle perspective, it improves personal finance. From youth to retirement, basic economic and financial competences, including specific pension literacy, help to plan for the future and to make better choices, thus reducing the probability of financial fragility, particularly in old age, and increasing economic independence, particularly for women. In the social sphere, a growing literature is demonstrating that basic financial education also affects public choices, influencing voting behaviour, economic reforms, policy outcomes, and, more generally, the workings of our democracies.

Spillover Effects of Financial Education: The Impact of School-Based Programs on Parents

Veronica Frisancho

Abstract: This paper studies whether school-based financial education has spillover effects from children to parents. Leveraging data from a large-scale experiment with public high schools in Peru and credit bureau records on the parents of the youth targeted, this study measures the impact of providing personal finance lessons during secondary school on parental financial behavior. Financial education lessons in the school yield limited average spillover effects, but lead to sizable effects on parental financial behavior within disadvantaged households. Among parents from poorer households, the treatment reduces default probability by 26%, increases credit scores by 5%, and increases current debt levels by 40%. The treatment has stronger effects among the parents of daughters, who experience a significant 6.7% increase in their credit score and a 28% reduction in their loan portfolio in arrears. Among the parents of boys, most of the spillover effects are muted.

Financial Literacy, Human Capital and Long-Run Economic Growth

Alberto Bucci, Riccardo Calcagno, Simone Marsiglio, and Tiago Neves Sequeira

Abstract: We extend a two-sector endogenous growth model based on human capital accumulation along two different directions. First, by postulating that individuals may invest time-resources not only in the accumulation of human capital (general knowledge) but also in the accumulation of financial literacy (specific financial knowledge). Second, we maintain that the efficiency with which savings are transferred intertemporally may improve over time, e.g. through the presence of a financial system. We use the model to analyze the relationship between financial literacy and economic growth in the long run. We show that the properties of the balanced growth path equilibrium critically depend on how human capital and financial literacy affect the efficiency of the financial system. Moreover, finance promotes long-run economic growth through two alternative channels, driven either by dynamics of financial returns or by human capital accumulation, respectively. By calibrating the model to the US economy over the 1950- 2019 period, we quantitatively assess the effect of financial literacy on long-term growth and the relative magnitude of the two channels.

The Financial Capability of the Youth in Greece

Vasiliki A. Tzora, Nikolaos D. Philippas and Georgios A. Panos

Abstract: We conduct the first nationally representative measurement of the financial capability of 15- year-old students in Greece. We find discrepancies between the core, the islands, and the periphery of the country. Female students score lower in terms of all knowledge, behaviour, and attitudes. Students in experimental schools, the better performing ones, and those with more educated parents are more financially capable, reflecting the absence of a dedicated personal-finance curriculum. Awareness of household finances is positively related to financial capability. Local economic conditions matter, with students in regions affected more by the crisis exhibiting lower financial capability.

Disparities in Financial Literacy, Pension Planning, and Saving Behavior

Tabea Bucher-Koenen, Andreas Hackethal, Johannes Kasinger, and Christine Laudenbach

Abstract: Financial literacy affects wealth accumulation, and pension planning plays a key role in this relationship. In a large field experiment, we employ a digital pension aggregation tool to confront a treatment group with a simplified overview of their current pension claims across all pillars of the pension system. We combine survey and administrative bank data to measure the effects on actual saving behavior. Access to the tool decreases pension uncertainty for treated individuals. Average savings increase — especially for the financially less literate. We conclude that simplification of pension information can potentially reduce disparities in pension planning and savings behavior.

Accounting and Finance Literacy and Entrepreneurship: An Exploratory Study

Marco Trombetta

Abstract: The aim of this study is to investigate whether the level of financial literacy differs significantly among entrepreneurs in three European countries: Italy, Spain, and the UK. Moreover, I analyze whether financial literacy fosters or hinders entrepreneurial resilience and success. I find that the level of basic financial literacy is significantly lower among entrepreneurs in the UK. I provide an explanation based on job opportunities arguing that basic financial literacy increases the chances of survival of a business, whereas advanced financial literacy decreases it. I propose a taxonomy linking levels of financial literacy with different approaches to financial management. I conclude that a “conservative” approach to financial management (cash based, debt-averse and diversified) is more likely to guarantee survival even if it is not necessarily the best way to maximize firm value.

Financial Literacy in the Age of Green Investment

Anders Anderson and David T. Robinson

Abstract: We survey a large sample of Swedish households and connect the responses to administrative data to relate pro-environmental attitudes and values to actual investment decisions. Pro-environment households are not more likely to hold proenvironment portfolios. This results from financial disengagement: they are less likely to own stocks, check pension balances, or make green active retirement planning choices. Green financial engagement is stronger in settings where financial literacy is higher or where informational hurdles are lower. Informational barriers appear to prevent financial market prices and returns from fully reflecting household environmental preferences.

Evaluating Deliberative Competence: A Simple Method with an Application to Financial Choice

Sandro Ambuehl, B. Douglas Bernheim, and Annamaria Lusardi

Abstract: We examine methods for evaluating opportunity-neutral interventions designed to improve the quality of decision making in settings where people imperfectly comprehend consequences. In an experiment involving financial education, conventional outcome metrics (financial literacy and directional changes in behavior) imply that two interventions, one with practice and feedback, one without, are equally beneficial even though only the first reduces average bias. We trace these evaluative failures to violations of implicit assumptions. We propose a simple intuitive outcome metric that properly differentiates between the interventions, and that is robustly interpretable as a measure of welfare loss even when consumers suffer from other biases.

Improving Financial Literacy by Mitigating Behavioural Biases: A Causal Mediation Analysis on the Effects of Behavioural-Based Financial Education

Francisco Pitthan and Kristof De Witte

Abstract: Financial illiteracy affects considerably the decision-making of individuals, leading to sub-optimal outcomes and lower financial welfare in the society. Although financial education has been demonstrated to improve financial knowledge, evidence of long-term effects is limited. This could be due to the presence of cognitive biases such as myopia, which have also been linked to poor decision-making. We propose a new behavioural-mediated mechanism of financial education in improving financial literacy not only directly, but also indirectly by increasing awareness of cognitive biases. In a randomized controlled trial among 814 secondary school students in Belgium, we tested the effectiveness of course materials that aim to explicitly mitigate the myopic bias while teaching children about financial matters. The results suggested that the intervention groups had significantly better results for both the financial literacy (up to 0.67 sd) and myopia (up to 0.39 sd) post-test scores in comparison to the control condition that did not receive the materials. Using causal mediation analysis, we showed that the significant indirect effects of behaviouralbased courses on financial literacy were mediated by better awareness of myopia, which was not observed in traditional courses.

The Evolution of Financial Literacy over Time and its Predictive Power for Financial Outcomes: Evidence from Longitudinal Data

Marco Angrisani, Jeremy Burke, Annamaria Lusardi, and Gary Mottola

Abstract: We administered the FINRA Foundation’s National Financial Capability Study questionnaire to members of the RAND American Life Panel in 2012 and 2018. Using this unique, longitudinal data set, we investigate the evolution of financial literacy over time and shed light on the effect of financial knowledge on financial outcomes. Over a six-year period, financial literacy appears to be rather stable, with a slight tendency to decline at older ages. Importantly, financial literacy has significant predictive power for future financial outcomes, even after controlling for baseline outcomes and a wide set of demographics and individual characteristics that influence financial decision making.

Crowdsourcing Peer Information to Change Spending Behavior

Francesco D’Acunto, Alberto G. Rossi, and Michael Weber

Abstract: Consumers might overestimate optimal spending if forming beliefs based on others’ spending, because others’ conspicuous consumption is more visible than the rest of their consumption. If true, information about others’ overall spending should change beliefs and choice. For a test, we provide crowdsourced information about anonymous “peer groups” to users of a FinTech app. Users converge to peers, especially when peer groups are more informative. For identification, we compare similar users matched to different peers based on sharp thresholds. A randomized control trial on a non-selected population supports external validity. Our results inform the design of robo-advisors for spending.

Is School-Based Financial Education Effective? Immediate and Long-Lasting Impacts on Students and Teachers

Veronica Frisancho

Abstract: This paper studies the potential of school-based financial education. Relying on a large-scale experiment in Peru, the study identifies significant improvements on financial skills. Novel credit bureau data uncovers long-lasting effects on financial behavior: three years later, treated students are less likely to have negative records due to unpaid/delinquent bills or credit card statements. Teachers accrue financial literacy gains that double those identified among students and they become more likely to save, particularly through formal channels. Two years after the intervention, teachers borrow more from banks and reduce their delinquency rates, while parents transition away from expensive sources of credit.