Financial Education For Long-Term Savings and Investment :
What does the Literature Tell Us?
Joanne YoongUSC/NUS
Wednesday, 26 February, 14
Overview
• Context
• Framework
• Highlights from the Literature
• Preliminary Observations
Wednesday, 26 February, 14
FE for LT Savings and Investments
• Content focus : knowledge, skills and capability to manage and accumulate savings to address long-term needs and risks (including pensions, education, marriage and divorce, funerals and loss of income)
• Product focus : savings products, term-deposits, unit trusts, mutual funds, bonds, shares and/or retirement funds/schemes
OECD Subgroup Definition
Wednesday, 26 February, 14
Project Scope
• Develop a framework for considering behavior on LT savings and investment and related interventions
• Investigate literature on LT savings and investment interventions
• Propose strategies to improve interventions
Wednesday, 26 February, 14
Different Target Audiences
• Young people • Workers • New retirees
Stages of the life-cycle
• Women • Migrants
Disadvantaged population
groups
• Windfall recipients • Suboptimal savers • Injured investors
“Vulnerable” savers and investors
Wednesday, 26 February, 14
Introduction
• Context
• Framework
• Highlights From The Literature
• Preliminary Observations
Wednesday, 26 February, 14
The Ideal Consumer
Understanding of financial products, risks and concepts
Wednesday, 26 February, 14
The Ideal Consumer
Understanding of financial products, risks and concepts
Awareness of financial risks and
opportunities
Wednesday, 26 February, 14
The Ideal Consumer
Understanding of financial products, risks and concepts
Awareness of financial risks and
opportunities
Making an informed choice
Wednesday, 26 February, 14
The Ideal Consumer
Understanding of financial products, risks and concepts
Awareness of financial risks and
opportunities
Making an informed choice
Seeking appropriate
help
Wednesday, 26 February, 14
The Ideal Consumer
Understanding of financial products, risks and concepts
Awareness of financial risks and
opportunities
Making an informed choice
Taking other actions for well-being
Seeking appropriate
help
Wednesday, 26 February, 14
The Ideal Consumer
Understanding of financial products, risks and concepts
Awareness of financial risks and
opportunities
Making an informed choice
Taking other actions for well-being
Seeking appropriate
help
KnowledgeSkills Confidence
Wednesday, 26 February, 14
The Ideal Bridge
Mandated Action Advice Instruction Information Laissez
Faire
Financial Education
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The Ideal Policy World
Scientific Evidence
Financial Education
Policy
Behavior Change
Wednesday, 26 February, 14
Back to the Consumer
Understanding of financial products, risks and concepts
Awareness of financial risks and
opportunities
Making an informed choice
Taking other actions for well-being
Seeking appropriate
help
KnowledgeSkills Confidence
Wednesday, 26 February, 14
Shadow Drivers of Choice
KnowledgeSkills Confidence
System 1 (Fast) System 2 (Slow)
Fast Slow
Constant, automatic Effortful, deliberate
Subconscious Self Aware
Reflexive, Associative Rational, logical
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Shadow Drivers of Choice
KnowledgeSkills Confidence
HeuristicsBeliefs and Preferences
Wednesday, 26 February, 14
Shadow Drivers of Choice
KnowledgeSkills Confidence
Beliefs and PreferencesHeuristics
Biases and Affect
Wednesday, 26 February, 14
What could go wrong?Frankly I don’t see
the problem with that…
Me neither
Wednesday, 26 February, 14
Some critical principles
• Understand your own circumstances and plan ahead for your future
• Take (calculated) risks
• Diversify your approaches
• Stay the course through short-term uncertainty
• Track and evaluate the financial consequences of your actions
Wednesday, 26 February, 14
Some critical problems
The past is a foreign country.
• Social, demographic and political change make it difficult to form actionable expectations about the future based on past norms and/or experiential learning
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Some critical problems
In the long run we are all dead
• Present-biased individuals have difficulty incurring short term costs for long-term gains
• Many of us are disaffected = have difficulty physically visualising the future
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Other problems
• Understand your own circumstances and plan ahead for your future
• Take (calculated) risks
• Diversify your approaches
• Stay the course through short-term uncertainty
• Track and evaluate the financial consequences of your actions
Wednesday, 26 February, 14
Other problems
• Understand your own circumstances and plan ahead for your future
• Take (calculated) risks
• Diversify your approaches
• Stay the course through short-term uncertainty
• Track and evaluate the financial consequences of your actions
• Inappropriate/inaccurate beliefs
• Poor financial numeracy; inappropriate loss aversion/ risk aversion / ambiguity aversion / regret aversion
• Complexity avoidance
• Emotional responses and disproportionate responses to salient events
• Limited attention and procrastination
Wednesday, 26 February, 14
Other problems
• Understand your own circumstances and plan ahead for your future
• Take (calculated) risks
• Diversify your approaches
• Stay the course through short-term uncertainty
• Track and evaluate the financial consequences of your actions
• Inappropriate/inaccurate beliefs
• Poor financial numeracy; inappropriate loss aversion/ risk aversion / ambiguity aversion / regret aversion
• Complexity avoidance
• Emotional responses and disproportionate responses to salient events
• Limited attention and procrastination
By no means exhaustive...
Wednesday, 26 February, 14
Introduction
• Context
• Framework
• Highlights From The Literature
• Preliminary Observations
Wednesday, 26 February, 14
Reflections On the Literature
• Existing cumulative evidence is still far from robust
• Mixed results and lack of comparable, robust study designs
• But four recent trends are cautiously promising
• Increasing number of international studies
• Increasing number of studies with “behavioral” component
• Increasing number of studies with RCT or other causal identification
• More positive “proof of concept” results
• Yet important areas of improvement remain from a policymaker perspective
• No consensus on best practices
• Virtually no studies of cost effectiveness
Wednesday, 26 February, 14
Reflections On the Literature
• Existing cumulative evidence is still far from robust
• Mixed results and lack of comparable, robust study designs
• But four recent trends are cautiously promising
• Increasing number of international studies
• Increasing number of studies with “behavioral” component
• Increasing number of studies with RCT or other causal identification
• More positive “proof of concept” results
• Yet important areas of improvement remain from a policymaker perspective
• No consensus on best practices
• Virtually no studies of cost effectiveness
Wednesday, 26 February, 14
Notable New Comprehensive Reviews
• Systematic Reviews and Meta Analysis
• Miller, Margaret, and Reichelstein, Julia and Salas, Christian and Zia, Bilal.(2014) “Can You Help Someone Become Financially Capable? A Meta-Analysis of the Literature”, Background Paper to the 2014 Global Financial Inclusion Report
• Fernandes, Daniel and Lynch, John G. and Netemeyer, Richard G. (2014) “Financial Literacy, Financial Education and Downstream Financial Behaviors”, Management Science, forthcoming
• Important Narrative Reviews
• Lusardi, Annamaria, and Olivia S. Mitchell (2013) “The Economic Importance of Financial Literacy: Theory and Evidence.” National Bureau of Economic Research Working Paper 18952
• Xu, Lisa and Zia, Bilal (2013), “Financial Literacy In the Developing World”, World Bank Mimeo (previously Policy Research Working Paper 6107)
• Hastings, Justine S. and Madrian, Brigitte C. and Skimmyhorn, Bill (2013) “Financial Literacy, Financial Education, and Economic Outcomes”. Annual Review of Economics, Vol. 5, pp. 347-373
Wednesday, 26 February, 14
Miller et al (2014)
• Covers 188 intervention studies
• Peer-reviewed studies of financial education between 2000-2013
• Previously included in literature reviews published since 2007
• Selected sources of grey literature (World Bank, OECD, etc)
• Examine studies on savings, retirement savings, record keeping and loan performance separately (unlike Fernandes et al 2013)
• Savings/retirement is the single largest subject area (30% of all papers, not including the “mixed” subject category)
Wednesday, 26 February, 14
Meta Analysis Results
Source: Miller et al(2013)
Of 6 studies that met the inclusion criteria (all RCTS)
only 2 found a significant effect
on savings
However, when the data is pooled and weighted, the
overall finding is that financial education does positively affect general savings at a 95% level
of confidence
Wednesday, 26 February, 14
Meta Analysis Results
Source: Miller et al(2013)
Of 5 studies that met the inclusion criteria, none were RCTs. 3 reported a significant
effect on savings
Data suggests that financial education can
significantly affect retirement savings albeit
at lower confidence
Wednesday, 26 February, 14
Case 1: Financial Education In Schools in Brazil Bruhn, Leao, Legovini, Marchetti and Zia(2012)
• Intervention: RCT of comprehensive financial education delivered to Brazilian high school students and families.
•As part of large-scale national initiative, embedded case-study based personal finance curriculum into existing classroom teaching
• Results: Exposure to curriculum increases savings
• Increased proficiency in knowledge, accompanied by increase in overall student savings rate and more expression of financial autonomy
• Parental interaction reinforces savings behavior
• Compare to: previous school-based studies disputing results based on observational evidence ( Bernheim, Garrett and Maki 2001, Cole and Sastry, 2010); other unpublished studies targeting school-age children (Berry, Karlan and Pradhan 2012)
Wednesday, 26 February, 14
Case 2: Financial Education In The US ArmySkimmyhorn (2012)
• Intervention: Quasi-experimental study of phased rollout of savings education delivered to newly enlisted US Army personnel in 2007-2008
•In-person 8 hour mandatory personal financial management course combined with immediate enrollment assistance
• Results: Attendance at PFMC increases retirement savings contributions to the Army Thrift Savings Plan by 2x with results persisting for at least 2 years
• Compare to: Previous studies of workplace financial education interventions which show little lasting effect on behavior (Duflo and Saez, 2002; Clark and D’Ambrosio, 2008)
Wednesday, 26 February, 14
• Intervention: 2x 2 RCT of savings and remittance training delivered to migrant workers and their families prior to departure.
•In-person group training of 8 hour module for families and 18 hour module for worker using comicbooks, brochures, games and take-home workbooks
• Results: Financial education was significantly more impactful in cases when training both migrants and their families
• No change in numeracy but significant impact on awareness
• No change in remittance level but significant impact on savings behavior
• Compare to: Previous savings FE studies in Indonesia (eg Cole, Sampson and Zia, 2011) as well as other types of FE targeted at migrant workers (eg Gibson, McKenzie and Zia 2012)
Case 3: “Who You Train Matters” Doi, McKenzie and Zia(2012)
Wednesday, 26 February, 14
Reflections On the Literature
• Existing cumulative evidence is still far from robust
• Mixed results and lack of comparable, robust study designs
• But four recent trends are cautiously promising
• Increasing number of international studies
• Increasing number of studies with “behavioral” component
• Increasing number of studies with RCT or other causal identification
• More positive “proof of concept” results
• Yet important areas of improvement remain from a policymaker perspective
• No consensus on best practices
• Virtually no studies of cost effectiveness
Wednesday, 26 February, 14
Meta Analysis Results
• Insufficient data to meaningfully examine effects of variation in characteristics across different interventions
Source: Miller et al(2013)
Wednesday, 26 February, 14
An Important Question...
More effective
More costly
Less costly
CLess
effective
Wednesday, 26 February, 14
An Important Question...
More effective
More costly
Less costly
CLess
effective
Wednesday, 26 February, 14
An Important Question...
More effective
More costly
Less costly
CCos
t effe
ctiveCos
t
ineffe
ctive
Less effective
Wednesday, 26 February, 14
Cost effectiveness is unknown
• Only 1 study to date - Cole, Sampson and Zia (2011)
• Intervention: RCT of savings-linked financial education training session developed for unbanked individuals to encourage use of SIMPEDES low-cost bank account
• Results: Limited success - only less-financially literate individuals showed any impact on opening bank accounts
• Cost-efficiency analysis: Compare FE to Subsidy
• Literacy training costs approximately $17 per head to deliver and increases chance of bank account by 5% at best
• Changing subsidy from $3 to $14 does so by 7.6%.
• Inducing the opening of one bank account cost $17/0.05 = $340 with education versus $11/0.076 = $145 with subsidy
Wednesday, 26 February, 14
In Conclusion• Understand your own circumstances and plan ahead for your future
• Take (calculated) risks
• Diversify your approaches
• Stay the course through short-term uncertainty
• Track and evaluate the financial consequences of your actions
We ask individuals to make LT investment for
their own future based on these principles
Wednesday, 26 February, 14
In Conclusion• Understand your own circumstances and plan ahead for your future
• Take (calculated) risks
• Diversify your approaches
• Stay the course through short-term uncertainty
• Track and evaluate the financial consequences of your actions
Consider FE as a LT investment in a country’s
future. Can we practise what we
preach when making policy?
Wednesday, 26 February, 14
5 First Lessons From The Field
Be open to evidence-
based innovation
Develop from and embed in context
Be specific in need and
content
Build in financial and non-financial incentives
Be open to evaluation
Wednesday, 26 February, 14
5 First Lessons From The Field
Be open to evidence-
based innovation
Develop from and embed in context
Be specific in need and
content
Build in financial and non-financial incentives
Be open to evaluation
Consider scientific evidence across disciplines• Financial education• Educational practice • Behavioral economics
But also have the courage to take risks• Conventional wisdom is changing
Wednesday, 26 February, 14
5 First Lessons From The Field
Be open to evidence-
based innovation
Develop from and embed in context
Be specific in need and
content
Build in financial and non-financial incentives
Be open to evaluation
Wednesday, 26 February, 14
5 First Lessons From The Field
Be open to evidence-
based innovation
Develop from and embed in context
Be specific in need and
content
Build in financial and non-financial incentives
Be open to evaluation
Assess need based on specific past/present/future
Seek out platforms that are tightly integrated into existing consumer pathways
Use pedagogical methods that address the capacity, motivations, experiences and preferences of the target audience Identify and work with complementary/substitute programs
For LT need to consider working across sectors
Wednesday, 26 February, 14
5 First Lessons From The Field
Be open to evidence-
based innovation
Develop from and embed in context
Be specific in need and
content
Build in financial and non-financial incentives
Be open to evaluation
Wednesday, 26 February, 14
5 First Lessons From The Field
Be open to evidence-
based innovation
Develop from and embed in context
Be specific in need and
content
Build in financial and non-financial incentives
Be open to evaluation
Prioritize and focus content delivery• Attention and time are scarce resources• Too much = avoidance and loss of confidence• Allow for repetition and reinforcement
For voluntary programs especially, pragmatic design and marketing is must-have, not “nice to have”
Teach knowledge acquisition or advice-seeking skills
Work together with regulatory approaches
Wednesday, 26 February, 14
5 First Lessons From The Field
Be open to evidence-
based innovation
Develop from and embed in context
Be specific in need and
content
Build in financial and non-financial incentives
Be open to evaluation
Wednesday, 26 February, 14
5 First Lessons From The Field
Be open to evidence-
based innovation
Develop from and embed in context
Be specific in need and
content
Build in financial and non-financial incentives
Be open to evaluation
No take up = No effect
No follow-through = No effect
And especially for LT, No continuity = No effect
Wednesday, 26 February, 14
5 First Lessons From The Field
Be open to evidence-
based innovation
Develop from and embed in context
Be specific in need and
content
Build in financial and non-financial incentives
Be open to evaluation
Plan from inception
Consider spectrum of approaches
Measure cost-effectiveness
Disseminate and share!!!
Wednesday, 26 February, 14
The Ideal (And Achievable) Virtuous Circle
Be open to evidence-
based innovation
Develop from and embed in context
Be specific in need and
content
Build in financial and non-financial incentives
Be open to evaluation
Wednesday, 26 February, 14
Thank you!
Discussion or comments related to the project (or not!)
are always welcome
[email protected][email protected]
Wednesday, 26 February, 14