Presentation to the World Bank

1. Presentation to the World Bank Annamaria Lusardi Financial Literacy Center and The George Washington School of Business December 1st, 2010 The Great Risk Shift: New Approaches to Financial Literacy

2. Relevance A new economic landscape • Individuals are increasingly in charge of their financial well-being • Changes in the pension landscape • More individual accounts • Changes in the labor markets • Increased mobility • Changes in the financial markets • Increased complexity

3. The “great risk shift” • Risk shift from the government and employer to individuals • How well-equipped are people to deal with this increased individual responsibility?

4. Dealing with the new economic landscape Critical role of 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

5. Measuring Financial Literacy (I) To test numeracy and understanding of interest rates, we asked: “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.

6. Measuring Financial Literacy (II) To test understanding of inflation, we asked: “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.

7. Measuring Financial Literacy (III) Finally, to test understanding of risk diversification, we asked: “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.

8. US National Financial Capability Study The 2009 National Financial Capability Study includes three linked surveys: • National Survey: Nationally-projectable telephone survey of 1,488 American adults • State-by-State Survey: Online survey of approximately 25,000 respondents (roughly 500 per state + DC) • Military Survey: Online survey of 800 military personnel and spouses

9. How much do Americans know? Distribution of responses across the US population Distribution of Responses to Financial Literacy Questions (%) NB: Only30%correctly answer all 3 questions correctly; less than half (46%)got the first two questions right.

10. Correct responses by gender (young: 23-28)

11. “Do not know” responses by gender

12. 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

13. How much do the Dutch know? Distribution of responses across the Dutch population Distribution of Responses to Financial Literacy Questions (%) NB: Less than half(45%)correctly answer all 3 questions correctly; 73%got the first two questions right.

14. How much do Germans know? Distribution of responses across the German population Distribution of Responses to Financial Literacy Questions (%) NB: Only53%correctly answer all 3 questions correctly; 72%got the first two questions right.

15. Linking Financial Literacy to Behavior • Debt and debt management • Investments • Planning and wealth accumulation

16. Financial literacy and mortgages • Studies show that those with low literacy are more likely to take up high cost mortgages and to default on them • Those with low education are less likely to refinance mortgages during a period of falling interest rates

17. Critical role of financial education Some important points • Many and interrelated financial decisions • Cannot focus on investment or asset building only • One size does not fit all • Large heterogeneity • Adult education • Different approach than teaching young students

18. Some suggestions • “How to increase the effectiveness of financial education and saving programs”.

19. Ideal venues to provide education Where to provide financial 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/SSA • Interest in good functioning of financial market • Long term horizon

20. Financial Literacy Center: Our guiding principles Financial illiteracy is widespread One size does not fit all A step-by-step approach is needed Evaluation is essential

21. How to help people in making financial decisions • The Dartmouth Project • Simplify financial decisions • Provide information when needed by individuals • Target specific groups • Use communication that does not rely on figures and numeracy

22. 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)

23. The Dartmouth Project: Planning Aid 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!

24. 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

25. Program Effectiveness There was a large increase in savings enrollment within 30 and 60 days of hiring among participants who received the brochure

26. Five Steps to Planning Success Harness the power of interest compounding Account for the effects of inflation Diversify your portfolio Take advantage of tax-favored assets If you have a 401(k) plan, take advantage of any employer matches The earlier these 5 steps are practiced, the greater their benefits

27. Personal Narratives • Psychological and social marketing research suggest that personal narratives could inspire behavior change • Power of narratives • Social cognitive theory: vicarious experience (behavioral modeling) can increase self-efficacy and behavior change (Bandura, 1989) • Role model stories are a central element in HIV education and other prevention campaigns (Corby, Enguidandos, Kay 1996) • Can create cognitive involvement & emotional immersion, change minds, and generate a desire to change course (Bruner, 1987) • Widely adopted in adult education with demonstrated effects on motivation, comprehension, and even recall (Norris et al. 2005; Davidhizar & Lonser 2003) • Outperform argument ads in promoting mental health literacy and improving health comprehension for poor readers (Michielutte et al. 1992)

28. Short Videos • Step 3: Risk diversification = don’t put all your eggs in one basket

29. Evaluation Tested interventions using American Life Panel Baseline quiz on 5 steps Randomly assigned Intervention group 2 steps as video only, 2 narratives only, 1 video & narrative Control group No intervention Repeated 5 steps quiz

30. Simplification and communication • Simplify decision-making • Use simple communication methods • As simple as a traffic light

31. Financial education in school Surveys show that the small proportion of young people 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 Assessment (PISA) Measure financial literacy among 15-years old in 19 countries in 2012

32. Financial Literacy Initiative at Dartmouth

33. Credit cards, paycheck, car purchase

34. Multimedia, interactive,

35. Other online videos For faculty development and discussion Improving Financial Literacy and Quantitative Reasoning Financial Literacy in the Quantitative Reasoning Classroom Savings and Debt Investment and Insurance Good Car/Bad Car Risky Car Deal A Little Today

36. 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 lecture does not transform individuals into “investment wizards”

37. Financial Entertainment • D2D Project: Celebrity Calamity

38. New D2D Game: Bite Club

39. Learning from other countries Financial literacy web-site: A reliable, independent, and expert source of information • Example: New Zealand’s Sorted http://www.sorted.org.nz/ • New web site in the US: mymoney.gov http://www.mymoney.gov/

40. Our new website: www.financialliteracyfocus.org

41. Concluding comments Financial literacy is a necessary skill, like reading and writing • Need to equip individual with tools to make decisions - Individuals make many financial decisions and these decisions are interrelated • Costs of financial illiteracy at both the individual and macro level