joanne yoong - 2014 symposium on financial education in korea

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


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


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


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


Introduction

• Context

• Framework

• Highlights From The Literature



The Ideal Consumer

Understanding of financial products, risks and concepts


The Ideal Consumer


Awareness of financial risks and

opportunities


The Ideal Consumer



opportunities

Making an informed choice


The Ideal Consumer



opportunities


Seeking appropriate

help


The Ideal Consumer



opportunities


Taking other actions for well-being

Seeking appropriate

help


The Ideal Consumer



opportunities



Seeking appropriate

help

KnowledgeSkills Confidence


The Ideal Bridge

Mandated Action Advice Instruction Information Laissez

Faire

Financial Education


The Ideal Policy World

Scientific Evidence

Financial Education

Policy

Behavior Change


Back to the Consumer



opportunities



Seeking appropriate

help



Theoretical Drivers of Choice



Shadow Drivers of Choice





System 1 (Fast) System 2 (Slow)

Fast Slow

Constant, automatic Effortful, deliberate

Subconscious Self Aware

Reflexive, Associative Rational, logical




Heuristics




HeuristicsBeliefs and Preferences




Beliefs and PreferencesHeuristics

Biases and Affect


What could go wrong?Frankly I don’t see

the problem with that…


What could go wrong?Frankly I don’t see

the problem with that…

Me neither


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


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


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


Other problems







Other problems






• 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


Other problems






• 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...


Introduction

• Context

• Framework




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


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


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)


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




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


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)


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)


• 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)


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



• Insufficient data to meaningfully examine effects of variation in characteristics across different interventions



An Important Question...

More effective

More costly

Less costly

CLess

effective


An Important Question...

More effective

More costly

Less costly

CCos

t effe

ctiveCos

t

ineffe

ctive

Less effective


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


Overview

• Context

• Framework

• Literature



In Conclusion• Understand your own circumstances and plan ahead for your future





We ask individuals to make LT investment for

their own future based on these principles


In Conclusion• Understand your own circumstances and plan ahead for your future





Consider FE as a LT investment in a country’s

future. Can we practise what we

preach when making policy?


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




based innovation



content



Consider scientific evidence across disciplines• Financial education• Educational practice • Behavioral economics

But also have the courage to take risks• Conventional wisdom is changing




based innovation



content






based innovation



content



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




based innovation



content






based innovation



content



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




based innovation



content






based innovation



content



No take up = No effect

No follow-through = No effect

And especially for LT, No continuity = No effect




based innovation



content



Plan from inception

Consider spectrum of approaches

Measure cost-effectiveness

Disseminate and share!!!


The Ideal (And Achievable) Virtuous Circle


based innovation



content




Thank you!

Discussion or comments related to the project (or not!)

are always welcome

[email protected][email protected]

[email protected]


mailto:[email protected]






Introduction

• Context

• Framework




joanne yoong - 2014 symposium on financial education in korea

News & Politics

savings products

informed choice

lt savings

investment interventions

fast system

related interventions

slow fast slow constant

investors vulnerable