Final Report

EUROPEAN INVESTMENT BANK INSTITUTE: FINANCIAL LITERACY PROGRAMME FINAL REPORT

Rob Alessie and Annamaria Lusardi

September 2016

 

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Research

GOOD THINGS COME TO THOSE WHO (ARE TAUGHT HOW TO) WAIT: RESULTS FROM A RANDOMIZED EDUCATIONAL INTERVENTION ON TIME PREFERENCE

Sule Alan and Seda Ertac

June 2016

Abstract: We report results from the impact evaluation of a randomized educational intervention targeted at elementary school children. The program uses case studies, stories and classroom activities to improve the ability to imagine future selves, and emphasizes forward-looking behavior. We find that treated students make more patient intertemporal choices in incentivized experimental tasks. The effect is stronger for students who are identified as present-biased in the baseline. Furthermore, using official administrative records, we find that treated children are signifcantly less likely to receive a low behavioral grade. These results are persistent one year after the intervention, replicate well in a different sample, and are robust across different experimental elicitation methods.

 

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ATTITUDES TOWARD DEBT AND DEBT BEHAVIOR

Johan Almenberg, Annamaria Lusardi, Jenny Säve-Söderbergh and Roine Vestman

September 2016

Abstract: We combine survey data on debt attitudes with registry data on household balance sheets in order to shed light on the determinants of household debt. We introduce a simple and novel survey measure of debt attitude, asking respondents if they are uncomfortable with debt. This measure helps explain observed household debt levels. Those who report being uncomfortable with debt have considerably lower debt levels, even when controlling for relevant socioeconomic variables. In addition, being uncomfortable with debt is strongly correlated between parents and children, suggesting intergenerational transmission of behavior and attitudes toward debt.

 

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CULTURE, FINANCIAL LITERACY AND SELF-CONTROL

Martin Brown, Caroline Henchoz and Thomas Spycher

September 2016

Abstract: We study the effect of culture on financial literacy and self-control by comparing students along the Swiss language border, sharply separating French and German speakers. We find that students at French-speaking schools have a sizeably lower level of financial literacy and tend to consume more impulsively compared to students at German-speaking schools. In a mediation analysis, we provide evidence that the effect is mainly mediated by financial socialization and attitudes towards money and consumption. Overall, our findings underline the importance of the cultural background of the target group in financial education programs. 

 

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ACCOUNTING AND FINANCE LITERACY AND SELF-EMPLOYMENT: AN EXPLORATORY STUDY

Marco Trombetta

May 2016

Abstract: The measurement of financial literacy has gained much attention in the recent past. Recent studies have shown that the level of basic financial literacy in the general population around the world is surprisingly low. In this study we investigate the level of financial literacy in a sample of self-employed entrepreneurs in Spain. In order to do accomplish this task we develop a new set of questions related to the financing and the financial reporting of a business. Our results show that also for this Spanish sample the overall level of basic financial literacy is quite low, even if it is slightly better than the one found in previous studies. We do not find significant differences between the level of financial literacy of entrepreneurs and non-entrepreneurs. However we find that serial successful entrepreneurs understand better diversification and the potential danger of uncontrolled growth. Interestingly, lower levels of accounting and finance literacy are found in mature businesses and operating in the primary sector, i.e. more traditional businesses. We interpret this result as an indication of the fact that the Spanish economy may be experiencing a transition phase from a model based on traditional businesses run on more conservative basis to more modern businesses run with a more sophisticated knowledge of financial concepts.

 

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UNDERSTANDING WHAT WORKS: CASE STUDIES IN FINANCIAL EDUCATION
Melissa Avery, Carlo de Bassa Scheresberg and Francesca Guiso

February 2016

Abstract: This report provides a review of case studies of financial education programs, primarily throughout Europe and the United States, in order to examine what makes such programs effective. We focus on providing summaries of financial education programs that have been rigorously tested in the field. We look at programs in four key venues: schools, workplaces, communities, and the Internet. Using evidence from these case studies, we offer a research-backed set of recommendations for developing effective, scalable, practical, and cost-effective programs in each venue.

 

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FINANCIAL LITERACY AMONG HIGH SCHOOL STUDENTS IN THE UNITED STATES: EVIDENCE FROM THE 2012 PROGRAMME FOR INTERNATIONAL STUDENT ASSESSMENT (PISA)

Annamaria Lusardi and Andrea Lopez

February 2016

Abstract: This paper uses data from the 2012 Programme for International Student Assessment (PISA) to analyze determinants of financial literacy among 15-year-old high school students in the United States. We look at a sample of 806 students, from 158 high schools throughout the U.S., who took the PISA survey. The average United States financial literacy performance is not statistically different from the OECD average; however, there are large variations in performance within the United States (only one in ten students score in the highest level of financial literacy). Our main finding is that socioeconomic characteristics are the strongest predictors of financial literacy. Students born in households that are one standard deviation richer than the average household (top 84% of the socioeconomic index) have, on average, a financial literacy score that is 35.5 points higher than students who live in the mean household. In addition, we find that a 10% increase in the proportion of math teachers in schools is associated with an 8 point increase in financial literacy score.

 

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WOMEN, CONFIDENCE, AND FINANCIAL LITERACY
Tabea Bucher-Koenen, Rob J. M. Alessie, Annamaria Lusardi and Maarten C. J. van Rooij

February 2016

Abstract: The literature documents robust evidence of a gender gap in financial literacy: Women consistently show lower levels of financial literacy than men. We have devised two surveys to investigate whether this gender gap is the result of lack of knowledge or lack of confidence. We show that women are less confident in their knowledge than men. Specifically, women disproportionately answer financial knowledge questions with “do not know,” even when they know the correct answer. We develop an empirical strategy to consistently estimate whether respondents know the correct answer. Using this improved metric for knowledge, we show that the gender gap diminishes by about half but does not disappear. Using this alternative measure of financial literacy, we show that financial knowledge continues to be an important predictor of financial behavior, such as participation in the stock market.

 

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GENDER DIFFERENCES IN FINANCIAL LITERACY: EVIDENCE FROM PISA DATA IN ITALY
Laura Bottazzi and Annamaria Lusardi 

February 2016

Abstract: In this paper, we use new and unexploited data on financial literacy among high school students inItaly. The Program for International Student Assessment (PISA) provided a unique set of data thatallows researchers to analyze financial literacy among this important population group. Italy is aninteresting country to study, as Italian students not only score particularly low on the financialliteracy assessment but also show a strong and significant gender difference. We are able todocument the impact of the family, in particular the mother, on the financial knowledge of girls.The environment in which girls and boys live also plays a role in explaining regional differences inthe gender gap. Moreover, history matters: medieval commercial hubs created favorablepreconditions for the transformation of the role of women in society, and in those regions today, wesee higher financial literacy among youths. Although we cannot completely explain the genderdifference in financial literacy, we can certainly show how factors affect boys and girls differently.

 

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FINANCIAL LITERACY OF DUTCH CHILDREN: DOES EDUCATION MATTER?
Anna Van der Schors, Tamara E. Madern, Rob J.M. Alessie and Minou van der Werf

February 2016

Abstract: In this paper we examine a Dutch school project called Cash Quiz, targeting 10- to 12-year-old children in the last years of primary school. The objective of this analysis is to study which elements of the Cash Quiz project are effective at improving financial literacy, so as to help design more effective financial education programs in schools. Although the design of the study has many limitations, the analysis shows that some elements are effectively covered in a one-time financial education program like Cash Quiz, whereas others are not, as they are already covered in class during the school year. Financial education programs for primary students should focus on improving specific elements of financial knowledge and the skills necessary to manage money in daily life.

 

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HOW FINANCIALLY LITERATE ARE WOMEN? AN OVERVIEW AND NEW INSIGHTS
Tabea Bucher-Koenen, Annamaria Lusardi, Rob J. M. Alessie and Maarten C. J. van Rooij

December 2014

Abstract: We document strikingly similar gender differences in financial literacy across countries. When asked to answer questions that measure knowledge of basic financial concepts, women are less likely than men to answer correctly and more likely to indicate that they do not know the answer. In addition, women give themselves lower scores on financial literacy self-assessments than men. Both young and old women show low levels of financial literacy. Moreover, women for whom financial knowledge is likely to be very important—for example widows or single women—also know little about concepts relevant for day-to-day financial decisions. Even women in favorable economic conditions are less financially knowledgeable than men. The gender differences are present for very basic as well as more advanced measures of financial literacy and financial sophistication. This is important because financial literacy has been linked to economic behavior, including retirement planning and wealth accumulation. Women live longer than men and are likely to spend time in widowhood. As a result, improving women’s financial literacy is key to helping them prepare for retirement and promoting their financial security.

 

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DEPOSIT WITHDRAWALS FROM DISTRESSED COMMERCIAL BANKS
Martin Brown, Benjamin Guin and Stefan Morkoetter

October 2014

Abstract: We study retail deposit withdrawals from European commercial banks which incurred investment losses in the wake of the U.S. subprime crisis. We document a strong propensity of households to withdraw deposits from distressed banks, especially when a bank receives a public bailout. However, the withdrawal risk for a distressed bank is mitigated by strong bank-client relationships and household-level switching costs: Households which rely on a single deposit account, which do not live close to a non-distressed bank, or which maintain a credit relationship with a distressed bank are significantly less likely to withdraw deposits. Our findings provide empirical support to the Basel III liquidity regulations which emphasize the role of well- established client relationships for the stability of bank funding.

 

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PATIENCE, SELF-CONTROL AND THE DEMAND FOR COMMITMENT: EVIDENCE FROM A LARGE-SCALE FIELD EXPERIMENT

Sule Alan

September 2014

Abstract: Poor financial decision-making is often associated with unfavorable outcomes such as poverty and over- indebtedness. While it is customary to attribute the ability to make sound financial decisions to the level of financial knowledge, some key non-cognitive skills may also play a role. Specifically, voluminous correlational studies point out the association between skills such as self-control, ability to delay gratification and patience in intertemporal choices and financial outcomes. This paper provides empirical evidence on the prevalence of self-control problems and the demand for commitment devices to mitigate such problems in children. We report results from a novel experiment that measures planned allocations, the demand for a commitment device, and actual choices in the context of chocolate consumption over two days. We find that a significant number of children are present-biased and there is a large demand for commitment to mitigate self-control problems. In addition, we identify important correlations between patience, commitment demand and time inconsistency, as well as student-specific personality traits and outcomes such as school success.

 

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FINANCIAL LITERACY AND RETIREMENT PLANNING IN SWITZERLAND

Martin Brown and Roman Graf

July 2013

Abstract: We use a representative survey covering 1,500 households to document the level of financial literacy in Switzerland and to examine how financial literacy is related to retirement planning. We measure financial literacy with standardized questions that capture knowledge about three basic financial concepts: Compound interest, inflation, and risk diversification. We measure retirement planning by the incidence of a voluntary retirement savings account. Our results show that financial literacy in Switzerland is high by international standards—a result which is compatible with the high ranking of Switzerland on the PISA mathematical scales. Financial literacy is lower among low-income, less-educated, and immigrant, non-native-speaking households as well as among women. We find that financial literacy is strongly correlated with voluntary retirement saving. Our results also show that financial literacy is correlated with financial market participation and mortgage borrowing.

 

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