Presentation to the 2010 IFIE/IOSCO Investor Education Conference Annamaria Lusardi, Dartmouth College and The George Washington School of Business November 8-9, 2010 Emerging Best Practice: Using the Best Thinking and Tools to Improve the Effectiveness of Investor Education
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Presentation to the 2010 IFIE/IOSCO Investor Education Conference
Presentation to the 2010 IFIE/IOSCO Investor Education Conference. Emerging Best Practice: Using the Best Thinking and Tools to Improve the Effectiveness of Investor Education. Annamaria Lusardi, Dartmouth College and The George Washington School of Business November 8-9, 2010. Relevance. - PowerPoint PPT Presentation
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Presentation to the 2010 IFIE/IOSCO Investor Education Conference
Annamaria Lusardi, Dartmouth College and The George Washington School of Business
November 8-9, 2010
Emerging Best Practice: Using the Best Thinking and Tools to Improve
the Effectiveness of Investor Education
Relevance
Individuals are increasingly in charge of their financial well-beingChanges in the pension landscape
More individual accountsChanges in the labor markets
Increased mobilityChanges in the financial markets
Increased complexity
A new economic landscape
The “great risk shift”
How well-equipped are people to make these decisions and what can financial education do?
Financial education
Levels of financial literacy are very low in both developed and developing countries
Financial education is essential but faces many barriers Costs Benefits tend to be in the long run Evaluation and effectiveness
Critical role of financial education
Measuring Financial Literacy (I)
“Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?”
i) more than $102; ii) exactly $102; iii) less than $102; iv) don’t know (DK); v) refuse to answer.
To test numeracy and understanding of interest rates, we asked:
Measuring Financial Literacy (II)
“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:”
i) more than today with the money in this account;
ii) exactly the same as;
iii) less than today
iv) DK;
v) refuse.
To test understanding of inflation, we asked:
Measuring Financial Literacy (III)
“Do you think the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.”
i) true;
ii) false;
iii) DK;
iv) Refuse.
Finally, to test understanding of risk diversification, we asked:
US National Financial Capability Study
1. National Survey: Nationally-projectable telephone survey of 1,488 American adults
2. State-by-State Survey: Online survey of approximately 25,000 respondents (roughly 500 per state + DC)
3. Military Survey: Online survey of 800 military personnel and spouses
The 2009 National Financial Capability Study includes three linked surveys:
Distribution of Responses to Financial Literacy Questions (%)
NB: Only 30% correctly answer all 3 questions correctly; less than half (46%) got the first two questions right.
Responses
Correct Incorrect DK Refuse
Interest rate 65% 21% 13% 1%
Inflation 64% 20% 14% 2%
Risk diversif. 52% 13% 34% 1%
How much do Americans know?
Distribution of responses across the US population
Financial Literacy around the World (FLat World)
These questions have been added to national surveys in:
Germany The Netherlands Italy Sweden Japan New Zealand Russia India
Findings are similar or worse than in the United States
Linking Financial Literacy to Behavior
•Debt and debt management
•Investments
•Planning and wealth accumulation
Financial literacy and mortgages
Studies show that those with low literacy are more likely to take up high cost mortgages
Those with low education are less likely to refinance mortgages during a period of falling interest rates
Lessons learned
Financial decisions are interrelatedCannot focus on investment or asset building
only
Limitations of disclosure and regulation Individuals do not read or understand financial matters
One size does not fit all
Critical role of financial education
Some suggestions
“How to increase the effectiveness of financial education and saving programs”.
Ideal venues to provide education
Employer-provided financial education Most people are at work
Financial education in school Most young people are in school We need education before individuals engage in financial
contracts
Financial education by the Treasury/Central bank/Regulatory authority Interest in good functioning of financial markets
Where to provide financial education
How to help people in making financial decisions
The Dartmouth ProjectSimplify financial
decisionsProvide information when
needed by individuals Target specific groupsUse communication that
does not rely on figures and numeracy
The Dartmouth Project: Planning Aid
Together with Punam Keller, I designed a planning aid intended to help college staff enroll in the college supplementary retirement account (SRA)
Most people plan on electing a supplemental retirement account, but feel they don’t have the time or information right now. We have outlined 7 simple steps to help you complete the election process. It will take between 15 – 30 minutes, from start to finish. It will take less time for you to start to insure your future than it takes you to unload your dishwasher!
Don’t give up! Contact the Benefits Office (6-3588) if for any reason you could not complete the online application.
It takes no time to prepare for your lifetime!
The Dartmouth Project: Planning Aid
In their own words : Four stories
Ron Whitcomb works in Facilities Operations & Management's Custodial Services. He has been with the College for fourteen years.
Topics discussed: Hopes for Retirement Parents as Role Models Why I Save Ron's Recommendations Planning for the Future
Program Effectiveness
30 days After Hire
60 days After Hire
Number of Observations
Control Group
7.3% 28.9% 210
7-Step
Planning aid
21.7% 44.7% 166
There was a large increase in savings enrollment within 30 and 60 days of hiring among participants who received the brochure
Provide good “nudges”
Automatically enroll workers into pensions at a set contribution rate and allocate their money into a life-cycle fund
Simple behavioral changes by employers can help:
Develop default options for other products as well
Add financial literacy to default options
Simplification and communication
Simplify decision-making
Use simple communication methods
As simple as a traffic light (chapter 4)
Financial education in schoolChapter 9 shows that the small proportion of young people (7%) who are financially knowledgeable are
Male White From college educated families
U.S. Financial literacy challenge: Test to measure financial knowledge in
participating schools
Programme for International Student Assessement (PISA)
Measure financial literacy among 15-years old in 19 countries in 2012
More on Financial education
Link financial education to other programs Entrepreneurship
Take into consideration different ways of learning
Videogames
Be realistic about outcomes A one-time retirement seminar does not
transform individuals into “investment wizards”
Video game: Celebrity Calamity
Project with Doorways to Dreams (founder is from Harvard Business School)
Avoid high interest rate debt
Exploit the power of interest compounding
Take advantage of tax incentives and employers‘matches
Plan for your future
Diversify your investments
Invest in low fees index funds
Rely on reliable information
Monitor Investment & Savings
Take time to choosethe right investment for you
Avoid too good deals
Make your money last a lifetime
The Saving Pyramid
Learning from other countries (chap 13)
Example: New Zealand’s Sortedhttp://www.sorted.org.nz/
New web site in the US: mymoney.govhttp://www.mymoney.gov/
Financial literacy web-site: A reliable, independent, and expert source of information