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Financial literacy and the need for financial education: evidence and implications

  • Annamaria Lusardi 1  

Swiss Journal of Economics and Statistics volume  155 , Article number:  1 ( 2019 ) Cite this article

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1 Introduction

Throughout their lifetime, individuals today are more responsible for their personal finances than ever before. With life expectancies rising, pension and social welfare systems are being strained. In many countries, employer-sponsored defined benefit (DB) pension plans are swiftly giving way to private defined contribution (DC) plans, shifting the responsibility for retirement saving and investing from employers to employees. Individuals have also experienced changes in labor markets. Skills are becoming more critical, leading to divergence in wages between those with a college education, or higher, and those with lower levels of education. Simultaneously, financial markets are rapidly changing, with developments in technology and new and more complex financial products. From student loans to mortgages, credit cards, mutual funds, and annuities, the range of financial products people have to choose from is very different from what it was in the past, and decisions relating to these financial products have implications for individual well-being. Moreover, the exponential growth in financial technology (fintech) is revolutionizing the way people make payments, decide about their financial investments, and seek financial advice. In this context, it is important to understand how financially knowledgeable people are and to what extent their knowledge of finance affects their financial decision-making.

An essential indicator of people’s ability to make financial decisions is their level of financial literacy. The Organisation for Economic Co-operation and Development (OECD) aptly defines financial literacy as not only the knowledge and understanding of financial concepts and risks but also the skills, motivation, and confidence to apply such knowledge and understanding in order to make effective decisions across a range of financial contexts, to improve the financial well-being of individuals and society, and to enable participation in economic life. Thus, financial literacy refers to both knowledge and financial behavior, and this paper will analyze research on both topics.

As I describe in more detail below, findings around the world are sobering. Financial literacy is low even in advanced economies with well-developed financial markets. On average, about one third of the global population has familiarity with the basic concepts that underlie everyday financial decisions (Lusardi and Mitchell, 2011c ). The average hides gaping vulnerabilities of certain population subgroups and even lower knowledge of specific financial topics. Furthermore, there is evidence of a lack of confidence, particularly among women, and this has implications for how people approach and make financial decisions. In the following sections, I describe how we measure financial literacy, the levels of literacy we find around the world, the implications of those findings for financial decision-making, and how we can improve financial literacy.

2 How financially literate are people?

2.1 measuring financial literacy: the big three.

In the context of rapid changes and constant developments in the financial sector and the broader economy, it is important to understand whether people are equipped to effectively navigate the maze of financial decisions that they face every day. To provide the tools for better financial decision-making, one must assess not only what people know but also what they need to know, and then evaluate the gap between those things. There are a few fundamental concepts at the basis of most financial decision-making. These concepts are universal, applying to every context and economic environment. Three such concepts are (1) numeracy as it relates to the capacity to do interest rate calculations and understand interest compounding; (2) understanding of inflation; and (3) understanding of risk diversification. Translating these concepts into easily measured financial literacy metrics is difficult, but Lusardi and Mitchell ( 2008 , 2011b , 2011c ) have designed a standard set of questions around these concepts and implemented them in numerous surveys in the USA and around the world.

Four principles informed the design of these questions, as described in detail by Lusardi and Mitchell ( 2014 ). The first is simplicity : the questions should measure knowledge of the building blocks fundamental to decision-making in an intertemporal setting. The second is relevance : the questions should relate to concepts pertinent to peoples’ day-to-day financial decisions over the life cycle; moreover, they must capture general rather than context-specific ideas. Third is brevity : the number of questions must be few enough to secure widespread adoption; and fourth is capacity to differentiate , meaning that questions should differentiate financial knowledge in such a way as to permit comparisons across people. Each of these principles is important in the context of face-to-face, telephone, and online surveys.

Three basic questions (since dubbed the “Big Three”) to measure financial literacy have been fielded in many surveys in the USA, including the National Financial Capability Study (NFCS) and, more recently, the Survey of Consumer Finances (SCF), and in many national surveys around the world. They have also become the standard way to measure financial literacy in surveys used by the private sector. For example, the Aegon Center for Longevity and Retirement included the Big Three questions in the 2018 Aegon Retirement Readiness Survey, covering around 16,000 people in 15 countries. Both ING and Allianz, but also investment funds, and pension funds have used the Big Three to measure financial literacy. The exact wording of the questions is provided in Table  1 .

2.2 Cross-country comparison

The first examination of financial literacy using the Big Three was possible due to a special module on financial literacy and retirement planning that Lusardi and Mitchell designed for the 2004 Health and Retirement Study (HRS), which is a survey of Americans over age 50. Astonishingly, the data showed that only half of older Americans—who presumably had made many financial decisions in their lives—could answer the two basic questions measuring understanding of interest rates and inflation (Lusardi and Mitchell, 2011b ). And just one third demonstrated understanding of these two concepts and answered the third question, measuring understanding of risk diversification, correctly. It is sobering that recent US surveys, such as the 2015 NFCS, the 2016 SCF, and the 2017 Survey of Household Economics and Financial Decisionmaking (SHED), show that financial knowledge has remained stubbornly low over time.

Over time, the Big Three have been added to other national surveys across countries and Lusardi and Mitchell have coordinated a project called Financial Literacy around the World (FLat World), which is an international comparison of financial literacy (Lusardi and Mitchell, 2011c ).

Findings from the FLat World project, which so far includes data from 15 countries, including Switzerland, highlight the urgent need to improve financial literacy (see Table  2 ). Across countries, financial literacy is at a crisis level, with the average rate of financial literacy, as measured by those answering correctly all three questions, at around 30%. Moreover, only around 50% of respondents in most countries are able to correctly answer the two financial literacy questions on interest rates and inflation correctly. A noteworthy point is that most countries included in the FLat World project have well-developed financial markets, which further highlights the cause for alarm over the demonstrated lack of the financial literacy. The fact that levels of financial literacy are so similar across countries with varying levels of economic development—indicating that in terms of financial knowledge, the world is indeed flat —shows that income levels or ubiquity of complex financial products do not by themselves equate to a more financially literate population.

Other noteworthy findings emerge in Table  2 . For instance, as expected, understanding of the effects of inflation (i.e., of real versus nominal values) among survey respondents is low in countries that have experienced deflation rather than inflation: in Japan, understanding of inflation is at 59%; in other countries, such as Germany, it is at 78% and, in the Netherlands, it is at 77%. Across countries, individuals have the lowest level of knowledge around the concept of risk, and the percentage of correct answers is particularly low when looking at knowledge of risk diversification. Here, we note the prevalence of “do not know” answers. While “do not know” responses hover around 15% on the topic of interest rates and 18% for inflation, about 30% of respondents—in some countries even more—are likely to respond “do not know” to the risk diversification question. In Switzerland, 74% answered the risk diversification question correctly and 13% reported not knowing the answer (compared to 3% and 4% responding “do not know” for the interest rates and inflation questions, respectively).

These findings are supported by many other surveys. For example, the 2014 Standard & Poor’s Global Financial Literacy Survey shows that, around the world, people know the least about risk and risk diversification (Klapper, Lusardi, and Van Oudheusden, 2015 ). Similarly, results from the 2016 Allianz survey, which collected evidence from ten European countries on money, financial literacy, and risk in the digital age, show very low-risk literacy in all countries covered by the survey. In Austria, Germany, and Switzerland, which are the three top-performing nations in term of financial knowledge, less than 20% of respondents can answer three questions related to knowledge of risk and risk diversification (Allianz, 2017 ).

Other surveys show that the findings about financial literacy correlate in an expected way with other data. For example, performance on the mathematics and science sections of the OECD Program for International Student Assessment (PISA) correlates with performance on the Big Three and, specifically, on the question relating to interest rates. Similarly, respondents in Sweden, which has experienced pension privatization, performed better on the risk diversification question (at 68%), than did respondents in Russia and East Germany, where people have had less exposure to the stock market. For researchers studying financial knowledge and its effects, these findings hint to the fact that financial literacy could be the result of choice and not an exogenous variable.

To summarize, financial literacy is low across the world and higher national income levels do not equate to a more financially literate population. The design of the Big Three questions enables a global comparison and allows for a deeper understanding of financial literacy. This enhances the measure’s utility because it helps to identify general and specific vulnerabilities across countries and within population subgroups, as will be explained in the next section.

2.3 Who knows the least?

Low financial literacy on average is exacerbated by patterns of vulnerability among specific population subgroups. For instance, as reported in Lusardi and Mitchell ( 2014 ), even though educational attainment is positively correlated with financial literacy, it is not sufficient. Even well-educated people are not necessarily savvy about money. Financial literacy is also low among the young. In the USA, less than 30% of respondents can correctly answer the Big Three by age 40, even though many consequential financial decisions are made well before that age (see Fig.  1 ). Similarly, in Switzerland, only 45% of those aged 35 or younger are able to correctly answer the Big Three questions. Footnote 1 And if people may learn from making financial decisions, that learning seems limited. As shown in Fig.  1 , many older individuals, who have already made decisions, cannot answer three basic financial literacy questions.

figure 1

Financial literacy across age in the USA. This figure shows the percentage of respondents who answered correctly all Big Three questions by age group (year 2015). Source: 2015 US National Financial Capability Study

A gender gap in financial literacy is also present across countries. Women are less likely than men to answer questions correctly. The gap is present not only on the overall scale but also within each topic, across countries of different income levels, and at different ages. Women are also disproportionately more likely to indicate that they do not know the answer to specific questions (Fig.  2 ), highlighting overconfidence among men and awareness of lack of knowledge among women. Even in Finland, which is a relatively equal society in terms of gender, 44% of men compared to 27% of women answer all three questions correctly and 18% of women give at least one “do not know” response versus less than 10% of men (Kalmi and Ruuskanen, 2017 ). These figures further reflect the universality of the Big Three questions. As reported in Fig.  2 , “do not know” responses among women are prevalent not only in European countries, for example, Switzerland, but also in North America (represented in the figure by the USA, though similar findings are reported in Canada) and in Asia (represented in the figure by Japan). Those interested in learning more about the differences in financial literacy across demographics and other characteristics can consult Lusardi and Mitchell ( 2011c , 2014 ).

figure 2

Gender differences in the responses to the Big Three questions. Sources: USA—Lusardi and Mitchell, 2011c ; Japan—Sekita, 2011 ; Switzerland—Brown and Graf, 2013

3 Does financial literacy matter?

A growing number of financial instruments have gained importance, including alternative financial services such as payday loans, pawnshops, and rent to own stores that charge very high interest rates. Simultaneously, in the changing economic landscape, people are increasingly responsible for personal financial planning and for investing and spending their resources throughout their lifetime. We have witnessed changes not only in the asset side of household balance sheets but also in the liability side. For example, in the USA, many people arrive close to retirement carrying a lot more debt than previous generations did (Lusardi, Mitchell, and Oggero, 2018 ). Overall, individuals are making substantially more financial decisions over their lifetime, living longer, and gaining access to a range of new financial products. These trends, combined with low financial literacy levels around the world and, particularly, among vulnerable population groups, indicate that elevating financial literacy must become a priority for policy makers.

There is ample evidence of the impact of financial literacy on people’s decisions and financial behavior. For example, financial literacy has been proven to affect both saving and investment behavior and debt management and borrowing practices. Empirically, financially savvy people are more likely to accumulate wealth (Lusardi and Mitchell, 2014 ). There are several explanations for why higher financial literacy translates into greater wealth. Several studies have documented that those who have higher financial literacy are more likely to plan for retirement, probably because they are more likely to appreciate the power of interest compounding and are better able to do calculations. According to the findings of the FLat World project, answering one additional financial question correctly is associated with a 3–4 percentage point greater probability of planning for retirement; this finding is seen in Germany, the USA, Japan, and Sweden. Financial literacy is found to have the strongest impact in the Netherlands, where knowing the right answer to one additional financial literacy question is associated with a 10 percentage point higher probability of planning (Mitchell and Lusardi, 2015 ). Empirically, planning is a very strong predictor of wealth; those who plan arrive close to retirement with two to three times the amount of wealth as those who do not plan (Lusardi and Mitchell, 2011b ).

Financial literacy is also associated with higher returns on investments and investment in more complex assets, such as stocks, which normally offer higher rates of return. This finding has important consequences for wealth; according to the simulation by Lusardi, Michaud, and Mitchell ( 2017 ), in the context of a life-cycle model of saving with many sources of uncertainty, from 30 to 40% of US retirement wealth inequality can be accounted for by differences in financial knowledge. These results show that financial literacy is not a sideshow, but it plays a critical role in saving and wealth accumulation.

Financial literacy is also strongly correlated with a greater ability to cope with emergency expenses and weather income shocks. Those who are financially literate are more likely to report that they can come up with $2000 in 30 days or that they are able to cover an emergency expense of $400 with cash or savings (Hasler, Lusardi, and Oggero, 2018 ).

With regard to debt behavior, those who are more financially literate are less likely to have credit card debt and more likely to pay the full balance of their credit card each month rather than just paying the minimum due (Lusardi and Tufano, 2009 , 2015 ). Individuals with higher financial literacy levels also are more likely to refinance their mortgages when it makes sense to do so, tend not to borrow against their 401(k) plans, and are less likely to use high-cost borrowing methods, e.g., payday loans, pawn shops, auto title loans, and refund anticipation loans (Lusardi and de Bassa Scheresberg, 2013 ).

Several studies have documented poor debt behavior and its link to financial literacy. Moore ( 2003 ) reported that the least financially literate are also more likely to have costly mortgages. Lusardi and Tufano ( 2015 ) showed that the least financially savvy incurred high transaction costs, paying higher fees and using high-cost borrowing methods. In their study, the less knowledgeable also reported excessive debt loads and an inability to judge their debt positions. Similarly, Mottola ( 2013 ) found that those with low financial literacy were more likely to engage in costly credit card behavior, and Utkus and Young ( 2011 ) concluded that the least literate were more likely to borrow against their 401(k) and pension accounts.

Young people also struggle with debt, in particular with student loans. According to Lusardi, de Bassa Scheresberg, and Oggero ( 2016 ), Millennials know little about their student loans and many do not attempt to calculate the payment amounts that will later be associated with the loans they take. When asked what they would do, if given the chance to revisit their student loan borrowing decisions, about half of Millennials indicate that they would make a different decision.

Finally, a recent report on Millennials in the USA (18- to 34-year-olds) noted the impact of financial technology (fintech) on the financial behavior of young individuals. New and rapidly expanding mobile payment options have made transactions easier, quicker, and more convenient. The average user of mobile payments apps and technology in the USA is a high-income, well-educated male who works full time and is likely to belong to an ethnic minority group. Overall, users of mobile payments are busy individuals who are financially active (holding more assets and incurring more debt). However, mobile payment users display expensive financial behaviors, such as spending more than they earn, using alternative financial services, and occasionally overdrawing their checking accounts. Additionally, mobile payment users display lower levels of financial literacy (Lusardi, de Bassa Scheresberg, and Avery, 2018 ). The rapid growth in fintech around the world juxtaposed with expensive financial behavior means that more attention must be paid to the impact of mobile payment use on financial behavior. Fintech is not a substitute for financial literacy.

4 The way forward for financial literacy and what works

Overall, financial literacy affects everything from day-to-day to long-term financial decisions, and this has implications for both individuals and society. Low levels of financial literacy across countries are correlated with ineffective spending and financial planning, and expensive borrowing and debt management. These low levels of financial literacy worldwide and their widespread implications necessitate urgent efforts. Results from various surveys and research show that the Big Three questions are useful not only in assessing aggregate financial literacy but also in identifying vulnerable population subgroups and areas of financial decision-making that need improvement. Thus, these findings are relevant for policy makers and practitioners. Financial illiteracy has implications not only for the decisions that people make for themselves but also for society. The rapid spread of mobile payment technology and alternative financial services combined with lack of financial literacy can exacerbate wealth inequality.

To be effective, financial literacy initiatives need to be large and scalable. Schools, workplaces, and community platforms provide unique opportunities to deliver financial education to large and often diverse segments of the population. Furthermore, stark vulnerabilities across countries make it clear that specific subgroups, such as women and young people, are ideal targets for financial literacy programs. Given women’s awareness of their lack of financial knowledge, as indicated via their “do not know” responses to the Big Three questions, they are likely to be more receptive to financial education.

The near-crisis levels of financial illiteracy, the adverse impact that it has on financial behavior, and the vulnerabilities of certain groups speak of the need for and importance of financial education. Financial education is a crucial foundation for raising financial literacy and informing the next generations of consumers, workers, and citizens. Many countries have seen efforts in recent years to implement and provide financial education in schools, colleges, and workplaces. However, the continuously low levels of financial literacy across the world indicate that a piece of the puzzle is missing. A key lesson is that when it comes to providing financial education, one size does not fit all. In addition to the potential for large-scale implementation, the main components of any financial literacy program should be tailored content, targeted at specific audiences. An effective financial education program efficiently identifies the needs of its audience, accurately targets vulnerable groups, has clear objectives, and relies on rigorous evaluation metrics.

Using measures like the Big Three questions, it is imperative to recognize vulnerable groups and their specific needs in program designs. Upon identification, the next step is to incorporate this knowledge into financial education programs and solutions.

School-based education can be transformational by preparing young people for important financial decisions. The OECD’s Programme for International Student Assessment (PISA), in both 2012 and 2015, found that, on average, only 10% of 15-year-olds achieved maximum proficiency on a five-point financial literacy scale. As of 2015, about one in five of students did not have even basic financial skills (see OECD, 2017 ). Rigorous financial education programs, coupled with teacher training and high school financial education requirements, are found to be correlated with fewer defaults and higher credit scores among young adults in the USA (Urban, Schmeiser, Collins, and Brown, 2018 ). It is important to target students and young adults in schools and colleges to provide them with the necessary tools to make sound financial decisions as they graduate and take on responsibilities, such as buying cars and houses, or starting retirement accounts. Given the rising cost of education and student loan debt and the need of young people to start contributing as early as possible to retirement accounts, the importance of financial education in school cannot be overstated.

There are three compelling reasons for having financial education in school. First, it is important to expose young people to the basic concepts underlying financial decision-making before they make important and consequential financial decisions. As noted in Fig.  1 , financial literacy is very low among the young and it does not seem to increase a lot with age/generations. Second, school provides access to financial literacy to groups who may not be exposed to it (or may not be equally exposed to it), for example, women. Third, it is important to reduce the costs of acquiring financial literacy, if we want to promote higher financial literacy both among individuals and among society.

There are compelling reasons to have personal finance courses in college as well. In the same way in which colleges and university offer courses in corporate finance to teach how to manage the finances of firms, so today individuals need the knowledge to manage their own finances over the lifetime, which in present discounted value often amount to large values and are made larger by private pension accounts.

Financial education can also be efficiently provided in workplaces. An effective financial education program targeted to adults recognizes the socioeconomic context of employees and offers interventions tailored to their specific needs. A case study conducted in 2013 with employees of the US Federal Reserve System showed that completing a financial literacy learning module led to significant changes in retirement planning behavior and better-performing investment portfolios (Clark, Lusardi, and Mitchell, 2017 ). It is also important to note the delivery method of these programs, especially when targeted to adults. For instance, video formats have a significantly higher impact on financial behavior than simple narratives, and instruction is most effective when it is kept brief and relevant (Heinberg et al., 2014 ).

The Big Three also show that it is particularly important to make people familiar with the concepts of risk and risk diversification. Programs devoted to teaching risk via, for example, visual tools have shown great promise (Lusardi et al., 2017 ). The complexity of some of these concepts and the costs of providing education in the workplace, coupled with the fact that many older individuals may not work or work in firms that do not offer such education, provide other reasons why financial education in school is so important.

Finally, it is important to provide financial education in the community, in places where people go to learn. A recent example is the International Federation of Finance Museums, an innovative global collaboration that promotes financial knowledge through museum exhibits and the exchange of resources. Museums can be places where to provide financial literacy both among the young and the old.

There are a variety of other ways in which financial education can be offered and also targeted to specific groups. However, there are few evaluations of the effectiveness of such initiatives and this is an area where more research is urgently needed, given the statistics reported in the first part of this paper.

5 Concluding remarks

The lack of financial literacy, even in some of the world’s most well-developed financial markets, is of acute concern and needs immediate attention. The Big Three questions that were designed to measure financial literacy go a long way in identifying aggregate differences in financial knowledge and highlighting vulnerabilities within populations and across topics of interest, thereby facilitating the development of tailored programs. Many such programs to provide financial education in schools and colleges, workplaces, and the larger community have taken existing evidence into account to create rigorous solutions. It is important to continue making strides in promoting financial literacy, by achieving scale and efficiency in future programs as well.

In August 2017, I was appointed Director of the Italian Financial Education Committee, tasked with designing and implementing the national strategy for financial literacy. I will be able to apply my research to policy and program initiatives in Italy to promote financial literacy: it is an essential skill in the twenty-first century, one that individuals need if they are to thrive economically in today’s society. As the research discussed in this paper well documents, financial literacy is like a global passport that allows individuals to make the most of the plethora of financial products available in the market and to make sound financial decisions. Financial literacy should be seen as a fundamental right and universal need, rather than the privilege of the relatively few consumers who have special access to financial knowledge or financial advice. In today’s world, financial literacy should be considered as important as basic literacy, i.e., the ability to read and write. Without it, individuals and societies cannot reach their full potential.

See Brown and Graf ( 2013 ).

Abbreviations

Defined benefit (refers to pension plan)

Defined contribution (refers to pension plan)

Financial Literacy around the World

National Financial Capability Study

Organisation for Economic Co-operation and Development

Programme for International Student Assessment

Survey of Consumer Finances

Survey of Household Economics and Financial Decisionmaking

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Acknowledgements

This paper represents a summary of the keynote address I gave to the 2018 Annual Meeting of the Swiss Society of Economics and Statistics. I would like to thank Monika Butler, Rafael Lalive, anonymous reviewers, and participants of the Annual Meeting for useful discussions and comments, and Raveesha Gupta for editorial support. All errors are my responsibility.

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Lusardi, A. Financial literacy and the need for financial education: evidence and implications. Swiss J Economics Statistics 155 , 1 (2019). https://doi.org/10.1186/s41937-019-0027-5

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There’s a financial literacy gender gap − and older women are eager for education that meets their needs

Lila Rabinovich , USC Dornsife College of Letters, Arts and Sciences

articles financial education

Financial education has its limits – if we want New Zealanders to be better with money, we need to start at home

Stephen Agnew , University of Canterbury

articles financial education

Don’t let financial shame be your ruin: open conversations can help ease the burden of personal debt

Matevz (Matt) Raskovic , Auckland University of Technology ; Aaron Gilbert , Auckland University of Technology , and Smita Singh , Auckland University of Technology

articles financial education

The royal commission should result not only in new regulation, but new education

Dirk Baur , The University of Western Australia ; Elizabeth Ooi , The University of Western Australia , and Paul Gerrans , The University of Western Australia

articles financial education

Why financial literacy should be taught in every school

Dilip Soman , University of Toronto

Related Topics

  • Dollarmites
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Top contributors

articles financial education

Social scientist, USC Dornsife College of Letters, Arts and Sciences

articles financial education

Senior Lecturer of Economics, University of Canterbury

articles financial education

Professor of Finance, The University of Western Australia

articles financial education

Lecturer, Finance, The University of Western Australia

articles financial education

Professor and Co-Director of Behavioural Economics in Action at Rotman (BEAR), University of Toronto

articles financial education

Professor of Finance, Auckland University of Technology

articles financial education

Associate Professor of International Business & Strategy, Auckland University of Technology

articles financial education

Senior Lecturer International Business, Strategy & Entrepreneurship, Auckland University of Technology

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Is School-Based Financial Education Effective? Immediate and Long-Lasting Impacts on High School Students

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Veronica Frisancho, Is School-Based Financial Education Effective? Immediate and Long-Lasting Impacts on High School Students, The Economic Journal , Volume 133, Issue 651, April 2023, Pages 1147–1180, https://doi.org/10.1093/ej/ueac084

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Relying on a large-scale experiment in Peru, this study evaluates the effects of an in-class intervention on financial literacy and financial behaviour. As soon as the programme is over, treated students record significant financial literacy gains that do not hinder their academic performance. The programme also leads to immediate changes in downstream financial behaviour as measured by financial autonomy and financial savviness. Credit bureau records gathered three years later show that early improvements in financial literacy translate into limited, but positive long-lasting changes in financial behaviour. The treatment did not affect students’ credit or repayment behaviour on the extensive margin, but, among those few with outstanding loans, it reduced arrears by 20%.

Financial education tends to trigger heated debates in academic and policy forums. Despite the evidence supporting a link between financial literacy and economic outcomes (Behrman et al ., 2012 ; van Rooij et al ., 2012 ; Lusardi and Mitchell, 2014 ; Lusardi et al ., 2017 ; Bianchi, 2018 ), many are skeptical that financial education programmes can effectively improve financial skills, let alone lead to sustained changes in financial choices and behaviour. The increased availability of experimental studies targeting children and the youth supports significant immediate impacts of school-based financial education on financial literacy (Frisancho, 2020 ; Kaiser and Menkhoff, 2020 ), but the ability of these programmes to yield robust and long-lasting effects on financial behaviour is still under scrutiny.

This paper exploits experimental variation in the delivery of mandatory personal finance lessons in Peru to study the immediate and potential long-lasting impacts of school-based financial education. Combining survey and credit bureau records on nearly 20,000 students, this paper shows that financial education in the school is effective to improve youth’s financial literacy and downstream financial behaviour in the short run and to generate limited but sustained effects on credit behaviour a few years out of school. Previous studies on the youth that have relied on experimental variation to assess the impact of financial education have measured financial outcomes using self-reported survey records and within a short time span of at most 16 months (Jamison et al ., 2014 ; Bruhn et al ., 2016 ; Bover et al ., 2018 ; Luhrmann et al ., 2018 ). 1 A number of studies assess the sustainability of financial education’s effects over longer-term horizons in the United States using administrative records such as census records, credit bureau records or financial aid data, but these rely on difference-in-differences models, synthetic control strategies or event studies that exploit non-experimental variation in course requirements during high school (Bernheim et al ., 2001 ; Brown et al ., 2016 ; Cole et al ., 2016 ; Stoddard and Urban, 2020 ; Urban et al ., 2020 ). This is the first study that relies on credible exogenous variation in exposure to financial education and complements survey records with rich administrative data that measure actual financial behaviour several years after the treatment.

This study relies on data from a large-scale randomised controlled trial implemented in 300 public high schools in six regions in Peru, targeting grades 9 through 11. The treatment was randomised at the school level and consisted of the delivery of financial education lessons during the school day, between August and December 2016. The curricula imparted varied across grades: while 9th graders received lessons on the differences between needs and resources and budgeting, 10th graders learnt about financial products and services and forward-looking choices and 11th graders received material on responsible financial consumers and access to information in financial markets. The instructors in charge of the lessons were school teachers who were trained in the material. Therefore, teachers are treated both directly through the training they receive as well as indirectly when delivering the lessons in the classroom.

Measurement of the impact of the treatment relies on both survey and administrative data sources. Students in the treatment and control groups were tested on their financial knowledge and surveyed both before and after the delivery of the lessons. The content of the financial literacy exam varied by grade, depending on the curricula. Survey data in both rounds included questions on financial behaviour such as financial autonomy, budgeting, and shopping and saving habits. Teachers in treated and control schools completed a financial knowledge exam and an exit survey. Access to school administrative records provides information on students’ cumulative grade point averages (GPAs) in two consecutive academic years, pre- and post-treatment. Furthermore, credit bureau data provide information on access to credit and delinquency for students and teachers three years after the intervention was launched.

The programme led to significant financial literacy gains among treated students: relative to the control group, scores in the financial literacy exit exam increased by 0.16 SDs in the treatment group. This effect is large when compared to voluntary after-school programmes (Jamison et al ., 2014 ; Berry et al ., 2018 ) and in line with similar school-based interventions (Bruhn et al ., 2016 ; Bover et al ., 2018 ). The introduction of financial education lessons did not hinder performance in other courses and had no effect on grade progression, which shows that the time diverted away from other courses and into personal finances did not jeopardise academic achievement. The provision of financial education also led to modest immediate changes in financial autonomy and financial savviness, the latter measured as budgeting usage and having healthy shopping habits.

Credit bureau records from the experimental sample show that early improvements in financial literacy translate into limited but positive long-lasting changes in financial behaviour among high school students. Three years after the launch of the intervention, the treatment did not lead to significant changes in students’ credit or repayment behaviour on the extensive margin: the likelihood to hold debt and the probability of being delinquent do not change due to the financial education programme. However, among those with outstanding loans, the treatment reduced arrears by 20%. The magnitude of this contraction is economically important, especially when benchmarked against Kaiser et al . ( 2022 ), a recent meta-analysis on the effectiveness of financial education focusing on randomised experiments. When measured in SDs, the treatment effect on arrears in the Peruvian pilot amounts to a 0.147 SD drop in the balance of delinquent debt, above the average effect sizes measured in Kaiser et al . ( 2022 ) for financial behaviour outcomes in general (0.100 SDs) and credit outcomes in particular (0.042 SDs).

While the effect on arrears survives multiple hypothesis testing, it is not robust to an alternative specification of the debt variables in dollars as opposed to log-transformed amounts. This suggests that a few large debt balances drive the results in levels. The fragility of the results on arrears is also partially explained by power issues as only a very small share of the experimental sample holds outstanding debt by the time in which EQUIFAX records are observed. Even three years after the intervention, individuals in the experimental sample are still very young: their average ages are between 18 and 20, depending on the cohort, and only 5% of the students in the control group have an outstanding loan. Focusing on this age group is relevant as it constitutes a key transition period when early mistakes can be costly and hard to amend, but one should keep in mind that the effect estimated on delinquent debt in the Peruvian context is present for a very small subsample. Previous studies that rely on course-requirement variations across US states and EQUIFAX data to measure credit management outcomes have focused either on older individuals or samples of similar age, but with denser credit histories. 2

A side contribution of the study is the focus on the financial literacy and behaviour outcomes of the instructors delivering the training. While some papers have looked at the evolution of teaching skills while teaching, far fewer have studied if instructors become more knowledgeable on a specific subject while teaching. Getting trained and imparting the financial education lessons improved teachers’ financial skills by 0.32 SDs, an impact twice as large as that identified among students. Teachers in the treatment group also recorded a 10% increase in the probability of saving as well as a 66% increase in their reported savings balances. The treatment did not affect their credit or repayment outcomes on the extensive margin. While the programme led to a sizeable reduction in arrears among teachers with outstanding debt, this effect is not statistically significant.

As an increasing number of countries are running school-based pilots with the hopes of scaling up financial education programmes in the school setting, it becomes critical to collect and share information on their effectiveness as well as their cost. At a cost per student of US |${\$}$| 4.8, the Peruvian programme yields a very low cost-effectiveness ratio in terms of students’ financial literacy: the cost per student to improve average financial skills by one standard deviation amounts to US |${\$}$| 30.7.

A growing body of research shows that financial knowledge is positively associated with financial outcomes. Van Rooij et al . ( 2012 ) provided evidence of a strong positive association between financial literacy and net worth, while Bianchi ( 2018 ) showed that the most financially literate households make portfolio choices that yield 0.4% higher yearly returns, relative to an average return of 4.3%. The main channel put forward to rationalise these findings is that financial knowledge reduces the costs of gathering and processing information, improving financial choices, and expanding potential investment portfolio choices. In fact, van Rooij et al . ( 2012 ) claimed that, in their setting, financial knowledge reduces information gaps, decreasing barriers to invest in the stock market.

Investment in financial literacy bears both costs and benefits that are differentially distributed over time. On the one hand, consumers with a high stock of financial skills have access to investment opportunities with higher returns. On the other hand, acquiring financial skills is a costly investment, not only in terms of the pecuniary costs it imposes, but also due to the time diverted away from other productive activities (Jappelli and Padula, 2013 ; Lusardi et al ., 2017 ). The provision of school-based financial education reduces both pecuniary and opportunity costs because classes are imparted during regular school hours. Indeed, several papers have shown that school-based financial education programmes have robust effects on children and youth’s financial literacy (Frisancho, 2020 ; Kaiser and Menkhoff, 2020 ), particularly when they have a mandatory nature and incorporate the content during regular classes.

This paper contributes to the literature on the effectiveness of financial literacy programmes for the youth in at least two ways. First, it relies on high-stakes data to measure the long-lasting effects of financial education on financial behaviour in an experimental setting. By complementing survey self-reported data with individual-level credit bureau records, this paper provides evidence on the impact of early investments in financial education on credit behaviour three years after the intervention, posing an advantage over closely related studies such as Jamison et al . ( 2014 ), Bruhn et al . ( 2016 ), Bover et al . ( 2018 ) and Luhrmann et al . ( 2018 ). While there are a handful of randomised experiments that have measured the effects of financial education on financial behaviour after 24 months (Kaiser et al ., 2022 ), these have all focused on adults. This study also contributes to the non-experimental literature that provides mixed evidence on the sustained impact of financial education programmes on credit management using EQUIFAX data for the United States. Cole et al . ( 2016 ) found that personal finance lessons have no effect on financial outcomes. In turn, Urban et al . ( 2020 ) showed that financial education requirements are associated with fewer defaults and higher credit scores among individuals and Brown et al . ( 2016 ) found a reduction in the share of delinquent debt relative to total outstanding balance. This study is closer to Urban et al . ( 2020 ) due to its focus on a similar age range and it is aligned with their results on repayment behaviour. Second, this paper tackles a recurring argument against the introduction of financial education lessons in the school setting: the substitution of time and resources away from other courses. Access to administrative academic records provides an opportunity to measure the programme’s opportunity cost in terms of individual marks and passing rates.

The remainder of this article is organised into five sections. The following section presents the experimental design and describes the data sources. Section  2 defines the outcome variables and presents the estimation strategy. Section  3 presents the results, focusing on the immediate effects on financial literacy and financial behaviour as well as on the medium-term effects on credit and repayment behaviour. Section  4 concludes.

1.1. The Intervention

In 2015, the Peruvian government launched the National Financial Inclusion Strategy, which included, as a high-priority goal, the provision of school-based financial education to all primary and secondary students by 2021. In this context, the Ministry of Education (MINEDU), the Superintendency of Banks and Insurance (SBS) and the Center of Studies (CEFI) of the Peruvian Association of Banks jointly developed a pilot to provide financial education to high school students. The implementation partners developed student workbooks for each of the last three high school grades (equivalent to 9th, 10th and 11th grades in the United States) as well as a teacher’s guide. The partners safeguarded that the lessons were aligned both with the basic education curriculum and the 2015 Peruvian national strategy of financial education (PLANEF, for its name in Spanish, Plan Nacional de Educacion Financiera ). 3 The lessons developed for the pilot were adapted to the specific content of the national curriculum for each grade, but, in general, they focused on two main goals: fostering economic citizenship and providing knowledge about individual rights and duties to fully exercise citizenship.

The implementation partners also designed and implemented a 20-hour teacher training plan divided into five sessions, which included a training component on the financial literacy contents (four sessions) as well as a pedagogical one (one session). MINEDU encouraged teachers to attend the training sessions and school principals were requested to facilitate teacher participation in the sessions. Participants received both a transport subsidy (mostly in kind) and a full meal during the workshop. Teachers were also provided with a completion certificate that counted towards the evaluation of their performance as an investment in professional development.

The content of the workbooks varies by grade and it is fully detailed in Table  A1 in Appendix   A . The lessons provided to ninth graders focused on the differences between needs and resources as well as on budgeting. The lessons imparted to 10th graders focused on financial products and services and forward-looking choices. The curriculum for 11th graders covered topics on becoming a responsible financial consumer as well as access to, and use of, personal information in financial markets.

The sessions were delivered during the regular classes of the course ‘History, Geography, and Economics’ (HGE). The workbooks and teachers’ guide supported teachers in the delivery of the lessons using a mix of case analysis, exercises, group activities and homework. The MINEDU instructed HGE teachers to incorporate the material in the economics portion of the course and monitored their engagement with the programme. Even though teachers were left to decide how to implement the sessions during the HGE course, they were provided some guidelines about the duration of the sessions covered in each workbook. The suggested number of hours required to cover all the lessons in the workbooks varied by grade, ranging from 16 (9th grade) to 24 (10th grade) to 32 (11th grade). 4 As the content of the lessons was not incorporated as a stand-alone course in the official curriculum, MINEDU could not enforce full compliance of the teachers in the classroom. Nevertheless, once a teacher delivered the personal finance lessons within the HGE regular course, the content became subject to performance evaluation and was considered high stakes from the students’ point of view.

The treatment was only fully implemented in all grades and regions during 2016. During 2017, the implementation partners had no resources to fund all activities, but the workbooks were still printed and distributed to the treatment schools. The MINEDU did not provide specific instructions to continue with the delivery of the lessons nor did it continue to offer teacher training sessions. Still, teachers in treatment schools may have continued to teach the material during the HGE classes even if no specific guidelines, monitoring nor incentives were provided. Unfortunately, there are no administrative or evaluation records available to check teachers’ engagement with the personal finance material after 2016.

Figure  1 organises the intervention activities that took place during the 2016 calendar year (in bold) as well as the evaluation activities that were carried out between 2016 and 2019. Teachers’ training workshops were conducted by the SBS and the MINEDU between mid-February and March, before the beginning of the school year. Additional replica sessions conducted by trained teachers were organised during the first month of classes to extend coverage of the training. The distribution of students’ workbooks to schools started in May and was completed successfully in all treated schools by July. The delivery of the sessions in class began during the second half of the 2016 school year: August through December. To ensure that compliance levels were high, regular monitoring phone calls took place September through November.

Study Timeline.

Note: Data collection activities may refer to the sample of students (S) and/or teachers (T).

Note: Data collection activities may refer to the sample of students (S) and/or teachers (T).

Treated and control schools were visited twice in 2016 to collect survey data and measure the financial skills of both students and teachers. Self-administered baseline surveys and financial literacy entry exams for students were simultaneously collected during May. Exit surveys and exams for students and teachers were conducted toward the end of the 2016 academic year. Individual-level data on marks and passing rates for the 2015 and 2016 academic years were provided by the MINEDU for all the schools in our sample. Credit bureau data on students and teachers were obtained from EQUIFAX, the leading private credit bureau in Peru. Students and teachers in our survey sample were searched in the bureau’s records in June 2019.

1.2. Sample Selection and Randomisation

The implementation partners decided to focus on full-day public high schools in urban areas in six regions of the country: Lima and Callao, Arequipa, Piura, Junin, Puno and San Martin. Because of logistic and implementation constraints, the sampling frame was limited depending on schools’ proximity to cities and a few additional restrictions (directly managed by the MINEDU, single-grade schools and the numbers of students by grade above the fifth percentile and below the 95th percentile), yielding a restricted universe of 308 eligible schools. 5

The sample of eligible schools was stratified by region. Following Bruhn and McKenzie ( 2009 ) and Bruhn et al . ( 2016 ), schools were paired by their similarity within each of the six strata. 6 This procedure returned 150 matched pairs, yielding a final experimental sample of 300 schools. Within each pair, schools were randomly assigned to either the control or the treatment group. The spatial distribution of control and treatment schools is plotted in Figure  A1 in Appendix   A .

Tables  A3 – A5 in Appendix   A provide basic descriptive statistics at the student and teacher level, as well as balancing tests of the randomisation (both at endline and baseline, in the case of students). Consistent with the random treatment assignment, very few significant differences are detected across groups. In any case, the estimation of treatment impacts considers the effect of background controls and, whenever available, initial levels of the dependent variable.

1.3. Data and Measurement

1.3.1. survey and exam data.

Survey and exam data were collected for students and teachers in the 300 schools of the experimental sample. Within each school, one classroom from each targeted grade was chosen at random to conduct the surveys and apply the exams. The main study sample comprises about 20,000 students (from 900 classrooms) and 453 teachers.

The students’ baseline survey collects basic information on socioeconomic characteristics of the household, students’ future aspirations, parental supervision, truancy and the number of hours the student works per week. The survey also measures students’ school engagement (Hart et al ., 2011 ) and collects data on previous exposure to financial education programmes. Financial behaviour is measured in the survey through several constructs: holding savings, budgeting, consumption and saving habits and financial autonomy (Bruhn et al ., 2016 ). The survey also measured monthly cash flows derived from different income sources including allowances, gifts from family and friends and labour. Despite their young age, Table  A4 in Appendix   A shows that 40% of the students at baseline performed paid work activities. These students record an average (median) monthly income of US |${\$}$| 102.6 (US |${\$}$| 33.2), with a third of their earnings coming from labour. Even among those who do not claim to work, average (median) monthly income amounts to US |${\$}$| 88.6 (US |${\$}$| 29.9). The instrument used at endline was exactly the same as that used at baseline, with the exclusion of the questions related to socioeconomic characteristics.

The survey questionnaire applied to teachers at endline was very similar to the students’ instrument, but additional questions were added to capture their professional background and experience, as well as their savings balances. To make room for these additional questions, questions on income were dropped. Teachers in the treatment group completed an additional survey module that inquired about their progress with the financial education material in the classroom.

Students’ financial literacy exams were grade specific and consisted of 15 questions. Four questions on the topics of risk, return and liquidity, intertemporal spending choices, budgeting to save and the importance of investing in skills and education were drawn from the 2008 national Jump |${\$}$| tart coalition survey of high school seniors and college students (Mandell, 2009 ). The remaining questions tested students on the topics covered in each grade-specific workbook. Most questions were drawn from an entry exam designed by the implementing partners and administered to teachers in the treatment group who attended at least one of the training sessions. A few questions were developed by the author to cover all topics included in the workbooks. The same grade-specific exam was administered at baseline and endline. The exit exam taken by teachers was developed by the author and included the four questions from the Jump |${\$}$| tart questionnaire as well as questions from the students’ exams for 9th grade (4), 10th grade (4) and 11th grade (3). Teachers had no access to the students’ exam questionnaires at baseline and the exit exam was applied to teachers and students during the same school visit. This ensures that teachers could not teach to the exam during the school year. The psychometric properties of the exam based on students’ baseline data are presented in Table B1 in Online Appendix B .

The experimental design is robust to the exclusion of pairs in which at least one school does not comply with the treatment assignment and/or has incomplete survey records. Indeed, two pairs of schools from the original experimental sample are excluded from the analysis due to non-response either in the baseline or the endline survey. The main analysis sample thus consists of 296 schools, with a total population of approximately 60,000 students. Baseline survey records are available for 20,622 students (7,003, 6,841 and 6,788 in 9th, 10th and 11th grades, respectively), roughly a third of the targeted population. The exit survey and exam were applied to 19,462 students (6,627, 6,489 and 6,346 in 9th, 10th and 11th grades, respectively) and 453 teachers. The attrition rate between baseline and endline among students is 17%, but it is not differential by treatment status (see Table  A6 in Appendix   A ). The sample of interest to evaluate the impact of the intervention includes all students with records in the follow-up survey and exam, as they have data on the outcome variables after exposure to the intervention. 7

1.3.2. School academic records

MINEDU’s academic records provide data for all high school students enrolled in any of the 300 schools of the experimental sample. These data contain individual-level information on cumulative marks by course and grade progression for two consecutive academic years, 2015 and 2016. The success rate when matching the exit survey and exam data with performance records from 2015 and 2016 is extremely high at 91% and 98%, respectively.

1.3.3. Credit bureau records

Credit outcomes three years after the intervention were provided by EQUIFAX, a private credit bureau that concentrates credit data from almost all lenders in the Peruvian credit market as well as non-credit information that may be relevant to determine a person’s ability to repay a loan. EQUIFAX collects credit information from all banks and most microfinance institutions. These records are very similar to those obtained by Urban et al . ( 2020 ), who relied on credit report data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel (CCP) to track young individuals.

EQUIFAX’s data contain records on all individuals in Peru who have reached legal age, irrespective of previous access to credit from financial institutions or other creditors. The National Identification and Civil Status Registry provides the bureau with monthly updates of the roster of people who are over age 18 in the country. EQUIFAX’s records capture an individual’s credit standing at the time in which she is searched.

The author provided EQUIFAX with individual identifiers (names and national IDs) collected in the survey and the bureau used these to match students and teachers with their records in June 2019. This snapshot provides information on loan balances by repayment status of the loan (i.e., current and past due debts), source of the funds (i.e., type of lender) and type of loan according to intended purpose (i.e., productive loans funding microenterprise and small business and non-productive loans including consumption loans, credit card debt, mortgages and auto financing). Although EQUIFAX produces individual credit scores that they share with their clients for a fee, this information was not shared with the author. In addition to loan balances, the credit bureau’s data also capture negative records corresponding to delinquency on non-credit related bills (e.g., cellphone, water, electricity, gas, etc.), taxes or credit card balances. Negative signals from non-credit bills stay active in the bureau’s database until the pending balance has been paid off or until five years have passed since the service provider has reported a late or missed payment. By law, EQUIFAX has to stop disclosing negative records after this exposure period expires, even if the debt has not been collected. 8 As opposed to the records on loans, which provide a snapshot of individual credit balances, the negative signals from non-credit bills provide retrospective information, although left censored to five years in the past.

Focusing on the endline sample, the match rate between survey and EQUIFAX records is 98% among students and 96% among teachers. The discrepancy between the survey and the administrative data may be due to mistakes in the identifiers collected in the survey and/or problems in the update of the national registry. By June 2019, 5% of the students in the control group had an outstanding loan. This number is in line with data from FINDEX that shows that, in 2017, only 8% of the people in the age bracket 15 to 24 borrowed money from a financial institution in Peru (Demirguc-Kunt et al ., 2018 ). Virtually all the loans contracted by the students in the sample come from regulated banking institutions such as banks and microfinance lenders (i.e., municipal savings and loans associations, rural savings and loans associations and other entities that promote the development of small businesses). In turn, by June 2019, 63% of the teachers in the control group had an outstanding loan with a banking institution. Among those with debts, 92% of them had loans with regulated lenders and 39% had debts with microfinance non-governmental organisations and cooperatives.

1.4. Teachers’ Compliance with the Treatment

Teachers were encouraged to attend the training sessions and to deliver the material in the classroom. Even though the MINEDU could not impose either of these activities as mandatory, teachers’ engagement with the pilot was high. About 73% of the teachers in the treatment group attended at least one training session and 43% had perfect attendance. Most teachers also complied with teaching the financial education material in the classroom. Teachers’ self-reports of their progress in the endline survey show that 48% of the HGE teachers in the treatment group had taught all the lessons and 21% had covered part of the material by the end of the school year. A third of the teachers reported not teaching the workbook lessons at all.

Several factors explain the relatively high compliance levels of teachers with the treatment. On the one hand, these were teachers who were already teaching economics as part of the content of the HGE course. It is thus very likely that they had greater interest in these topics relative to the rest of the school staff. Second, the MINEDU designed an incentive scheme that motivated teachers’ participation in the training by providing a completion certificate. This was valuable for the teachers as the educational system in Peru promotes them based on merit and one of the criteria to evaluate their performance relates to their investments in professional development through refresher courses, training, certifications and graduate studies. Third, the teacher training’s content was in itself attractive for the participants. Professional facilitators knowledgeable on personal finances and with several years of experience in delivering training led the sessions and delivered the content in a very interactive and clear format. Teachers received lessons on the content of the three grades all together, which allowed them to benefit from the progressive building of financial knowledge while covering the three curricula. Finally, the materials developed to deliver the classroom lessons were kept simple in the exposition of concepts and provided several opportunities to promote active learning both during the teacher training and the delivery of the lessons to students.

Survey data reveal that, on average, HGE teachers chose to incorporate the new material by significantly reducing the time allocated to teach history, politics and world news, while leaving the time allotted to economics unchanged. This may respond to potential synergies between the economics portion of the course and the financial education material recognised by the teachers. Unfortunately, grade effects by subtopic cannot be estimated using administrative records as teachers allocate a single grade for the HGE course at the end of each academic year.

2.1. Outcome Variables

2.1.1. students.

Scores in the financial literacy exams are measured at endline and standardised at the grade level, using the distribution of the control group in the baseline exam as a benchmark. Immediate changes in financial behaviour are also captured through three outcomes measured in the endline survey: financial autonomy; the probability of saving and financial savviness. Unfortunately, the students’ surveys did not collect information on saving balances. The financial autonomy index (Bruhn et al ., 2016 ) captures individual responses to questions aiming at measuring whether students felt empowered, confident, and capable of making independent financial choices and influencing their households’ financial decisions. Financial savviness is also measured as an index that aggregates four binary outcomes: keeps a budget, saves before buying something that cannot be afforded, compares prices and bargains before shopping. 9 Both indexes are computed as an equally weighted average of the z -scores of each component. These z -scores are obtained by subtracting the control group mean and dividing by the control group SD.

Relying on administrative records on students’ credit behaviour, six main outcomes are constructed. First, three outcomes measure impacts on the extensive margin of credit and repayment outcomes: the probability of having an outstanding loan, either current or past due; the probability of having a loan in arrears and the probability of having arrears in a non-credit bill or a credit card statement. To capture the effects of the treatment on the intensive margin, three additional outcomes are measured: current and past due debt, conditional on having an outstanding loan; and past due debt in non-credit bills, conditional on having arrears in a non-credit bill or a credit card statement. All debt variables are log-transformed. The logarithmic transformation is convenient due to the skewness of the debt variables (long right tails), even after conditioning on having outstanding loans. Brown et al . ( 2016 ) performed the same transformation for mortgage loans in their sample. Taking logs also makes much more sense to think about changes in debt in a multiplicative scale rather than an arithmetic scale.

The effect of the intervention on academic performance is assessed by focusing on GPAs, the probability of passing a grade (or graduating, in the case of 11th graders), and aspirations to get a university degree. Marks and grade progression are constructed using school administrative records, while the latter comes from survey data. Cumulative marks and marks by course (math, verbal and HGE) are observed at the end of the intervention year and standardised at the grade/course level, using the distribution of the control group in 2015 as a benchmark. Marks are also normalised by school quality to make them comparable across schools (see Online Appendix B4 ). Aspirations are measured as a dichotomous variable that is equal to one if the highest expected degree is university.

2.1.2. Teachers

Financial literacy is measured using exit exam scores, which are standardised using the distribution of the control group as a benchmark. Teachers’ financial behaviour is measured relying on both survey and credit bureau data. Survey-based behaviour outcomes include those used for students as well as savings balances. Teachers’ credit and repayment behaviour is evaluated using the same outcome variables defined for students in the EQUIFAX database.

2.2. Estimation Strategy

The impact of the treatment is measured by |$\beta$|⁠ , the coefficient on the indicator of treatment status, |$T_{\textit {jp}}$|⁠ , which is equal to one whenever the school was randomised into the treatment group and zero otherwise. All regressions include additional individual and background characteristics as controls, |$X_{\textit {ijp}}$|⁠ , and a set of dummies, |$d_{\textit {jp}}$|⁠ , identifying the pair of schools matched. Note that students’ and teachers’ results are not sensitive to the exclusion of controls (results available upon request). The Romano–Wolf correction is implemented for each family of outcomes to deal with potential issues of simultaneous inference (Romano and Wolf, 2005 ).

The main specification corresponds to ITT effects to keep the results for the Peruvian pilot comparable to those presented in similar studies (Jamison et al ., 2014 ; Luhrmann et al ., 2015 ; Bruhn et al ., 2016 ; Berry et al ., 2018 ; Bover et al ., 2018 ; Batty et al ., 2020 ). ITT effects also provide a more conservative estimate of the effects on the beneficiaries, while taking into account issues of non-compliance in the field. This is particularly important in the estimation of the treatment effects on outcomes measured after the endline. When looking at financial literacy and behaviour at endline, there are no differences in exposure across grades. However, when assessing the effects of the treatment on credit behaviour three years later, potential variation in the years of exposure to the programme arises. As neither teacher nor school-level records of compliance are available due to lack of administrative or survey records between 2017 and 2018, ITT effects are more suitable to measure the impact on outcomes measured after 2016. This approach is feasible as the treatment assignment at the school level was respected throughout the analysis period (between 2016 and 2019).

Unfortunately, it is impossible to link teacher training attendance records to grades or classes as these administrative data do not include such identifiers. Note that teacher attendance defines effective treatment only during the first year of the intervention. Therefore, ATT effects will only be estimated for outcomes measured during that same year, 2016.

3.1. Treatment Impacts on Students

3.1.1. immediate effects on financial literacy and financial behaviour (by endline, 2016).

Column (1) in Table  1 presents the effects of the treatment on financial literacy at endline. Overall, the programme improved high school students’ scores in the exit financial literacy exam by 0.16 SDs. These average gains are closely aligned with the experimental evidence available to date on school-based programmes. Figure  2 presents the results from a meta-analysis conducted with 10 experimental studies targeting children and the youth and confirms that the impact of the Peruvian high school programme on financial knowledge is very close to the average effect size in the literature, estimated at 0.18 SDs and significant at the 95% confidence interval. The results are particularly comparable to those reported by similar programmes targeting high school students in Brazil (Bruhn et al ., 2016 ) and Spain (Bover et al ., 2018 ).

The Impact of Financial Education on Financial Literacy: Average Effect Sizes of Programmes Targeting the Youth.

Notes: Author’s own elaboration. Estimates come from a random effects meta-analysis regression for a sample of recent experimental studies focusing on the youth: Hinojosa et al. (2009); Becchetti and Pisani (2012); Jamison et al. (2014); Batty et al. (2015;2020); Bruhn et al. (2016); Furtado et al. (2017); Berry et al. (2018); Bover et al. (2018).

Notes: Author’s own elaboration. Estimates come from a random effects meta-analysis regression for a sample of recent experimental studies focusing on the youth: Hinojosa et al . ( 2009 ); Becchetti and Pisani ( 2012 ); Jamison et al . ( 2014 ); Batty et al . ( 2015 ; 2020 ); Bruhn et al . ( 2016 ); Furtado et al . ( 2017 ); Berry et al . ( 2018 ); Bover et al . ( 2018 ).

Effect on Students’ Financial Literacy and Financial Behaviour.

Notes: All outcomes are measured at the end of the 2016 academic year. Scores in the financial literacy exams are standardised at the grade level, using the distribution of the control group in the baseline exam as a benchmark. The financial autonomy index aggregates 15 binary variables capturing whether students felt empowered, confident and capable of making independent financial choices and influencing their households’ financial decisions. The probability of saving captures both formal and informal savings decisions. The financial savviness index aggregates four binary variables measuring if the student keeps a budget, saves before buying something that cannot be afforded, compares prices and bargains before shopping. The financial autonomy and financial savviness indexes are computed as an equally weighted average of the z -scores of each of its components. These z -scores are obtained by subtracting the control group mean and dividing by the control group SD. School pairs with incomplete survey records for at least one school are excluded from estimation. Asterisks denote significance levels (*10%; **5%; ***1%) based on unadjusted p -values. Daggers denote significance levels based on the Romano–Wolf adjusted p -values ( ⁠|$^{\dagger}$| 10%, |$^{\dagger \dagger}$| 5%, |$^{\dagger \dagger \dagger}$| 1%) resulting from 1,000 bootstrap replications. Correction for multiple testing implemented for financial literacy, financial autonomy, probability of saving and financial savviness. OLS estimates, standard errors clustered at the school level are reported in parentheses. All specifications include a set of dummy variables that correspond to the matched pairs of schools and the following set of controls: grade, sex, currently working, received financial education lessons in the past, ratio of household members to bedrooms, asset index, high level of parental supervision, lives with both parents and has dinner with parents each day of the week. The value of the dependent variable at baseline is also included as a control.

Financial knowledge results may be driven by teachers teaching to the test, especially as some of the questions on the students’ exam were based on the entry exam that teachers in treatment schools took at the beginning of the training workshops (see Subsection  1.3 ). Nevertheless, average treatment effects are quite robust (coefficient = 0.12 SDs, p -value = 0) even when financial skills are measured using only the questions developed either by Jump$tart or by the author.

One recurring argument against the introduction of financial education lessons in the school setting is the substitution of time and resources away from other courses, potentially sacrificing student learning in other areas. Columns (1)–(4) of Table  A8 in Appendix   A suggest that the opportunity cost of introducing personal finance content is not high enough to hinder academic performance in terms of marks. At the end of the 2016 academic year, the treatment has no significant effect either on cumulative marks or on specific course marks. If anything, the personal finance lessons slightly boost language performance, without any deterioration of HGE marks or math marks.

A few studies on the youth have shown that financial education may influence adolescents’ intertemporal choices. For instance, Luhrmann et al . ( 2018 ) showed that the provision of school-based financial education in German high schools led treated students to make more time-consistent choices, increasing the quality of intertemporal decision-making. Exposure to financial education may even foster young people’s investment in future schooling if financial education lessons impact students’ perceptions and valuations of alternative future trajectories. However, Column (5) of Table  A8 in Appendix   A shows that the intervention in Peru does not yield any significant effects on grade promotion. Column (6) shows that students’ aspirations to pursue tertiary education also remain unchanged, which could respond to already high baseline levels (83% of the students in the control group expect to obtain a university degree).

Because the endline survey takes place at the end of the 2016 academic year, there is a limited range of students’ self-reported financial behaviours that can be measured by then as they are still underage and have limited financial services available to them. However, students still manage a budget and make shopping decisions that can be shaped by the treatment. 10 The immediate impacts of the treatment on financial behaviour are measured through three survey outcomes that aim at capturing changes in students’ daily habits and financial behaviour at their young age. Columns (2)–(4) of Table  1 show that the gains measured in terms of students’ financial literacy have modest trickle down effects on short-run financial behaviour. The treatment does not lead to significant changes in the probability of saving, already at 0.59 among the control group, but it does seem to have modest impacts on financial autonomy and financial savviness, the latter capturing students’ budgeting and shopping habits. Relative to the control, the treatment group records 0.02 SD and 0.03 SD gains in their levels of financial autonomy and savviness, respectively.

Appendix   A presents ATT effects for students’ outcomes measured during 2016, where effective compliance is defined at the school level based on teachers’ self-reporting of the coverage of lessons. As expected, these are even larger than the estimated ITT effects. Additionally, all the outcomes measuring financial behaviour in the short run (i.e., financial autonomy, financial savviness and the probability of saving) become significant and survive multiple hypothesis testing (see Table  A9 ).

At a cost per student of US$4.8, the programme yields a very low cost-effectiveness ratio in terms of students’ financial literacy: the cost per student to improve average financial skills by one standard deviation is US$30.7 (see Online Appendix B3 for more details).

3.1.2. Medium-term effects on financial behaviour (by June 2019)

Financial education is expected to increase financial literacy by reducing the costs of gathering and processing information when making financial choices, which can then translate into actual changes in financial behaviour. While the previous results showed modest changes in that respect, several concerns arise in relation to survey-based outcomes. First, they are measured early during the students’ life cycle as economic agents. Even though the youth in the experimental sample actively engage in financial transactions while at school, the volume and diversity of these is still limited. Second, survey outcomes are self-reported and subject to misreporting biases, particularly social-desirability biases in the treatment group. Third, survey-based outcomes are measured as soon as the intervention concludes and are thus unable to capture long-lasting effects of the financial education programme on financial behaviour.

These potential issues are overcome with administrative records on students’ actual credit behaviour. These data reflect credit and repayment choices that the students made three years after the intervention, giving a more accurate measure of their financial behaviour over time. Table  2 presents the estimated treatment impacts on credit and repayment behaviour by June 2019. Three years after the launch of the intervention, treated students do not significantly differ from control group students in terms of their likelihood to hold outstanding debt or their likelihood to have loans in arrears (see columns (1) and (2)). Similarly, the treatment does not affect the probability of having arrears in non-credit bills or credit card debt (column (3)).

Effects on Students’ Credit and Delinquency Outcomes.

Notes: Students’ credit and default outcomes measured in June 2019. Current debt and debt in arrears are measured in US dollars and log-transformed. School pairs with incomplete survey records for at least one school are excluded from estimation. Asterisks denote significance levels (*10%; **5%; ***1%) based on unadjusted p -values. Daggers denote significance levels based on the Romano–Wolf adjusted p -values ( ⁠|$^{\dagger}$| 10%, |$^{\dagger \dagger}$| 5%, |$^{\dagger \dagger \dagger}$| 1%) resulting from 1,000 bootstrap replications. Correction for multiple testing implemented for two families of outcomes: ( i ) probability of having debt, probability of having loan arrears and probability of having arrears from other bills and ( ii ) current debt and debt arrears in loans. OLS estimates, standard errors clustered at the school level are reported in parentheses. All specifications include a set of dummy variables that correspond to the matched pairs of schools and the following set of controls: grade, sex, currently working, received financial education lessons in the past, ratio of household members to bedrooms, asset index, high level of parental supervision, lives with both parents and has dinner with parents each day of the week.

Still, the treatment may yield an impact on students’ debt portfolios and repayment outcomes. If students were becoming indebted without taking into account their repayment capacity or fully understanding the conditions that they were being offered, the provision of financial education can actually reduce their demand for credit on the intensive margin. The treatment may also affect the type of loans students take as they become more familiar with concepts such as returns, investments and interest rates. For instance, Stoddard and Urban ( 2020 ) showed that personal finance graduation requirements increase students’ likelihood to use federal aid and reduce private loan balances when making choices about college funding. Their results also showed that students exposed to financial literacy mandates tend to shy away from higher cost borrowing (i.e., credit card loans).

The results in columns (1)–(3) show that the treatment does not affect the probability of having a loan or having arrears. As there is no sample selection into borrowing, columns (4) and (5) present the treatment impacts on current debt and loan arrears when conditioning on the subsample of students who had an outstanding loan in June 2019. Similarly, column (6) presents the treatment effect on arrears corresponding to non-credit bills and credit card debt, conditional on having such arrears by June 2019. While the programme fails to impact the size of the amount in arrears from non-credit bills, it significantly reduces loan arrears by almost 20%. Importantly, the treatment does not impact actual usage of current debt, which indicates that credit usage is not hindered.

The results on debt balances are robust to an alternative specification of the outcome variables using the inverse hyperbolic sine transformation. In particular, the results conditional on participation stay robust: the reduction in arrears survives multiple hypothesis testing and the estimated coefficient is equivalent to a 22.4% contraction in delinquent loan balances, very similar to the 20% reduction estimated using the log-transformation (see column (5) of Table  A10 in Appendix   A ).

The impact on arrears is aligned with Brown et al . ( 2016 ), who relied on event studies and found that exposure to financial education during high school reduced the proportion of debt balance that is delinquent. While their estimates only yield a 2% reduction, their baseline model is not directly comparable as it includes all individuals in the sample, even those without debts. The improvement in repayment outcomes among active borrowers in Peru is also in line with Urban et al . ( 2020 ), who implemented a synthetic control strategy and found that financial education course requirements in high school reduced 30-day delinquency rates by 40% in Texas and 50% in Georgia. In contrast, Cole et al . ( 2016 ) found that state-mandated personal finance high school courses do not influence credit behaviour during adulthood (ages 35–54). Their analysis focused on policy changes that took place much earlier than those analysed in Brown et al . ( 2016 ) or Urban et al . ( 2020 ) and thus focused on older adults. Thus, their results do not necessarily imply that there are no sustained effects of financial education targeting the youth, but that these effects may dissipate over longer time horizons. Nevertheless, it is hard to benchmark the magnitude of the results on repayment for the Peruvian study against these non-experimental papers focusing on the US case. On the one hand, differences in the estimated impacts may be related to a focus on a sample coming from a developed country where agents from the same age are heavily reliant on debt. On the other hand, the variation exploited by these studies is not exogenous and raises several concerns.

3.1.3. Discussion

In sum, the school-based financial education programme effectively improved high school students’ financial literacy levels with low opportunity costs in terms of academic outcomes. These knowledge gains had modest trickle-down effects on short-run financial behaviour. Financial education lessons do not lead to selection into borrowing or into being delinquent, but, among those with debt, they significantly reduce students’ arrears by 20%. This effect reflects better repayment behaviour on the intensive margin, which is aligned with the positive impacts of the intervention on financial autonomy and financial savviness in the short run.

The effect on arrears survives multiple hypothesis testing; it is not robust to an alternative specification of the dependent variable in dollars as opposed to log-transformed amounts. The estimated treatment effects become very noisy when using the debt variables in levels, regardless of the use of controls or the inclusion of non-borrowers as zeros (results available upon request). Still, all specifications in levels yield a sizeable (though non-significant) reduction of arrears. This suggests that a few large debt balances drive the results when arrears are not log-transformed. Part of the problem is related to power issues as only a very small share of the experimental sample holds outstanding debt by the time in which the EQUIFAX records are observed.

Note that, even three years after the intervention, individuals in the experimental sample are still very young: their average ages are between 18 and 20, depending on the cohort, and only 5% of the students in the control group have an outstanding loan. Thus, the effect found on delinquent debt is present for a very small subsample.

The effect on arrears is economically meaningful in size, amounting to a 0.147 SD drop in the balance of delinquent debt. It is particularly large when benchmarked against Kaiser et al . ( 2022 ), a recent meta-analysis on the causal impact of financial education programmes. The authors estimated an average effect size of 0.042 SDs on credit outcomes, the smallest when compared to other downstream financial behaviours such as budgeting (0.147 SDs), saving (0.097 SDs), insurance (0.059 SDs) and remittances (0.047 SDs). Even though the meta-analysis is not specific to young adults (in fact, 72.4% of their sampled studies focus on adults above age 25) and includes studies with different time horizons and data sources to measure financial outcomes, it still serves as a nice reference point for the treatment effects obtained when using credit bureau data.

The reduction in arrears may have important implications on youth’s future access to credit and borrowing conditions. Young adults in the 18–25 age bracket have limited access to credit from financial institutions due to their low levels of income and asset accumulation patterns at early stages of their life cycle. Lack of access to tailored financial services as well as their inexperience and low financial literacy levels can lead to usage of expensive sources of credit and high delinquency rates relative to other age groups. The treatment does not improve their engagement with the credit market and has no impact on their delinquency rates. However, it is effective to improve repayment behaviour of those few who are active borrowers at an early age, fostering better performance at the onset of their credit histories.

A recurrent concern in the economics of education literature is that interventions that aim at fostering learning end up widening initial inequalities due to heterogeneous effects of the treatment. This same concern applies to financial education programmes, but very few studies focusing on the youth estimate heterogeneous treatment impacts. A notable exception is Stoddard and Urban ( 2020 ), who focused on heterogeneity by family background, including disposable income and race or ethnicity. Kaiser and Menkhoff ( 2020 ) showed results for subsamples of studies in their meta-analysis to test for differential effects by country per capita income, delay in measurement, intensity and class size. However, none of the experiments or quasi-experiments included in their review presents heterogeneous effects by individual characteristics. Online Appendix B2 presents the analysis of heterogeneous effects by sex, socioeconomic status and baseline financial literacy scores. In general, the impact of school-based financial education on financial literacy and short-run financial behaviour seems to be very inclusive: treatment effects are quite similar by sex or baseline score. However, students from households with a higher asset index benefit relatively more from the financial literacy lessons: a 1 SD increase in the asset index significantly raises the treatment effect on financial literacy by 0.05 SDs. In the medium run, a higher asset index is also associated with a significant effect on the probability of having debt. While the average treatment effect on the extensive margin is null, a 1 SD increase in the asset index yields a 0.007 increase in the probability of having outstanding debt, a 14% increase relative to the control. Because this effect is not accompanied by an increase in the probability of having arrears, this is potentially a welfare-improving effect. Data from the control group indicate that students from households with higher asset indexes have a relatively lower probability of having an outstanding loan. Thus, this differential effect does not lead to increased inequality by socioeconomic status in terms of access to credit.

3.2. Treatment Impacts on Teachers

3.2.1. immediate effects on financial literacy and financial behaviour (by endline, 2016).

Column (1) of Table  3 presents initial evidence on the first-hand effect of the financial education programme on teachers’ financial literacy. On average, the treatment generates knowledge gains of 0.32 SDs. This is a sizeable effect, both when compared to previous meta-analysis on the effects of financial education on adults (Fernandes et al ., 2014 ; Miller et al ., 2014 ) as well as more recent and favourable ones (Kaiser and Menkhoff, 2017 ; Kaiser et al ., 2022 ).

Effect on Teachers’ Financial Literacy and Financial Behaviour.

Notes: All outcomes are measured at the end of the 2016 academic year. Scores in the financial literacy exams are standardised at the grade level, using the distribution of the control group in the baseline exam as a benchmark. The financial autonomy index aggregates 15 binary variables capturing whether teachers felt empowered, confident and capable of making independent financial choices and influencing their households’ financial decisions. The probability of saving captures both formal and informal savings decisions. Savings balances are expressed in US dollars. The financial savviness index aggregates four binary variables measuring if the teacher keeps a budget, saves before buying something that cannot be afforded, compares prices and bargains before shopping. The financial autonomy and financial savviness indexes are computed as an equally weighted average of the z -scores of each of its components. These z -scores are obtained by subtracting the control group mean and dividing by the control group SD. School pairs with incomplete survey records for at least one school are excluded from estimation. Asterisks denote significance levels (*10%; **5%; ***1%) based on unadjusted p -values. Daggers denote the Romano–Wolf adjusted p -values ( ⁠|$^{\dagger}$| 10%, |$^{\dagger \dagger}$| 5%, |$^{\dagger \dagger \dagger}$| 1%) resulting from 1,000 bootstrap replications. Correction for multiple testing implemented for financial literacy, financial autonomy, probability of saving, savings balance and financial savviness. OLS estimates, standard errors clustered at the school level are reported in parentheses. All specifications include a set of dummy variables that correspond to the matched pairs of schools and the following set of controls: sex, type of contract, total hours teaching, experience, degree in social sciences and postgraduate studies.

The financial literacy gains accrued by teachers translate into important changes in their savings behaviour. Column (3) of Table  3 shows that teachers in the treatment group become 8.7 percentage points more likely to save, relative to 83% of the teachers saving in the control group. The programme also led to higher savings balances: relative to the control group, teachers in the treatment group increase their savings balances by US$516, an amount equivalent to two-thirds of the balance kept by the control group (see column (4)). The treatment did not translate into significant changes in financial autonomy (see column (2)), nor did it lead to changes in financial savviness (see column (5)).

Savings behaviour is a self-reported measure that may be influenced by social desirability bias, especially after being exposed to the financial education material. Unfortunately, this cannot be directly tested as administrative records on savings behaviour do not exist. Nevertheless, the treatment effect on the probability of saving is larger than similar estimates from studies evaluating the impact of financial education for adults on savings, which suggests that it cannot be fully explained by measurement error. For instance, Seshan and Yang ( 2012 ) found that exposure to a financial literacy workshop does not affect the probability of saving among Indian migrants in Qatar, while Cole et al . ( 2011 ) identified no effect of a financial education programme on the probability of opening a savings account among unbanked urban households in Indonesia. The results on the likelihood to save identified among teachers are more in line with those obtained by Drexler et al . ( 2014 ), who reported that the delivery of a heuristic financial training programme led to an 8 percentage point increase in the probability of saving among microfinance clients in the Dominican Republic.

As mentioned before, teachers are treated both directly through the training they receive as well as indirectly when delivering the lessons. Intensity of the treatment they experience will thus depend on their own choice to teach the lessons. A crucial difference between a teacher and another adult receiving financial education is that the former has to continuously teach the content. The exercise of simplifying the concepts and repeating them to their students in different ways may enhance learning. Table  A11 in Appendix   A presents the ATT effects on teachers’ outcomes by the degree of repetition of the content, confirming that the more teachers deliver the content, the greater the impact on their levels of financial literacy and the improvement in their financial downstream financial behaviour.

As the number of sessions taught is not exogenous and instead may depend on the motivation of the teachers and their initial levels of financial knowledge, this exercise is only informative and should not be regarded as one yielding causal effects. However, even though selection into teaching based on unobservables or initial levels of financial literacy cannot be ruled out, no important pattern emerges when checking how ex ante teachers’ and students’ observables affect the probability of teaching the lessons in the classroom (see Table  A12 in Appendix   A ).

3.2.2. Medium-term effects on financial behaviour (by June 2019)

Table  4 presents the treatment impacts on teachers’ credit behaviour three years after the launch of the intervention. First, note that teachers have far more access to credit than the average Peruvian: more than half of them have outstanding debt balances, while only one in three adults borrow from formal credit sources in Peru. This high level of bancarisation among teachers may be explained by the quality and formality of their jobs. As contract teachers, public servants receive their wages into a bank account in the national bank, which may enable them to access credit from other lenders in the market.

Effects on Teachers’ Credit and Delinquency Outcomes.

Notes: Teachers’ credit and default outcomes measured in June 2019. Current debt and debt in arrears are measured in US dollars and log-transformed. School pairs with incomplete survey records for at least one school are excluded from estimation. Asterisks denote significance levels (*10%; **5%; ***1%) based on unadjusted p -values. Daggers denote significance levels based on the Romano–Wolf adjusted p -values ( ⁠|$^{\dagger}$| 10%, |$^{\dagger \dagger}$| 5%, |$^{\dagger \dagger \dagger}$| 1%) resulting from 1,000 bootstrap replications. Correction for multiple testing implemented for two families of outcomes: ( i ) probability of having debt, probability of having loan arrears and probability of having arrears from other bills, and ( ii ) current debt and debt arrears in loans. OLS estimates, standard errors clustered at the school level are reported in parentheses. All specifications include a set of dummy variables that correspond to the matched pairs of schools and the following set of controls: sex, type of contract, total hours teaching, experience, degree in social sciences and postgraduate studies.

The treatment did not affect teachers’ likelihood to hold an outstanding loan in June 2019 (see column (1)) or the probability of having arrears (see columns (2) and (3)). However, it led to a decrease in debt arrears among those with outstanding loans (column (5)). This seems to be a sizeable effect when compared to the baseline levels in the control, but it is not statistically significant due to the reduced size of the sample of teachers.

Overall, the treatment does not have an effect on teachers’ credit management outcomes. As treated teachers increased their probability of saving and their savings balances, one could expect to see a drop in their debt levels. The lack of an impact on credit outcomes either on the extensive or on the intensive margin may indicate that teachers face credit constraints and that they resort to savings to deal with them.

3.2.3. Discussion

All in all, the programme led to significant and sizeable treatment effects on financial literacy and savings behaviour among teachers. However, these effects do not lead to sustained changes in credit and repayment behaviour.

While the treatment impacts on financial literacy are aligned with those identified among students, the effects on financial behaviour differ in the short and the medium runs. As adults, teachers have had more time than students to invest in financial literacy during their life cycle. Exposure to financial education offers them the opportunity to access additional knowledge and information, but it will only be effective to change their financial behaviour along the dimensions in which they face the largest pre-treatment knowledge gaps. The results for teachers thus suggest that they faced relatively larger knowledge gaps on topics such as the importance of savings and mechanisms to save, and less so in the case of healthy budgeting, shopping practices or credit management.

The results on teachers contribute to answer a more general and often overlooked question in the education and human capital accumulation literature, which is whether someone can learn a skill or change their own behaviour by teaching. Some specialised papers study learning about teaching during the initial formation period of an educator and later on while teaching, showing that instructors’ teaching skills tend to improve through teaching (Grudnoff and Tuck, 2003 ). 11 However, far fewer studies focus on the hypothesis that teachers can become more knowledgeable on a specific subject while delivering the content to their students. A notable exception comes from Bakhtiar et al . ( 2021 ). They provided formal business training to experienced female micro-entrepreneurs in Ethiopia, who then become mentors of other female-led businesses. While mentees do not experience significant effects on profits, the bundled effect of receiving training and providing mentoring leads to an important increase in profits among mentors.

The results on teachers are also indicative of the quality of the programme delivered in Peru. The sizeable treatment impacts on financial literacy that they experience confirm that the trainers were knowledgeable on the content of the lessons imparted in the classroom.

In the last decade, numerous countries have given financial education a central role in their efforts to promote financial inclusion. National financial inclusion strategies often have a strong financial education component, with an emphasis on children and youth. As an increasing number of governments debate about the inclusion of financial education in the official school curriculum and as more resources are allocated to the development and implementation of school-based financial education programmes, it is critical to evaluate the effectiveness of such efforts.

Relying on a large-scale experiment implemented in 300 public schools in Peru, this study measures the effects of a school-based financial education programme for high school students. The study combines survey and credit bureau records on nearly 20,000 students and measures the immediate and sustained impacts of school-based financial education on financial behaviour. Previous studies on the effectiveness of financial education on the youth have relied on experimental variation and self-reported survey records within a short time span. Another strand of the literature has tried to assess the sustainability of financial education’s effects over longer-term horizons using high-stakes data to measure financial behaviour, but relying on non-experimental variation in course requirements during high school or college in the United States. This is the first study that relies on credible exogenous variation in exposure to financial education and complements survey records with rich administrative data, alleviating self-reporting biases and providing a measure of actual financial behaviour several years after the treatment.

This study supports the immediate effectiveness of school-based financial education programmes. It also finds limited but sustained effects on financial behaviour when students are aged between 18 and 20, a key period in which young adults are becoming economically independent. The treatment did not affect students’ credit or repayment behaviour on the extensive margin, but, among those few with outstanding loans, it reduced loan portfolios in arrears by 20%.

Credit and repayment outcomes are especially relevant for this population as early mistakes can be costly and hard to amend. By reducing the average size of the portfolio in arrears, the treatment fosters better performance at the onset of their credit histories. This effect is economically meaningful in size: it is equivalent to a 0.147 SD drop in the balance of delinquent debt, well above the average effect size estimated for credit outcomes (0.042 SDs) in Kaiser et al . ( 2022 ). The effects on repayment in other non-experimental papers focusing on the US case go in the same direction, but it is hard to benchmark the impact on arrears against them. On the one hand, the magnitude of the effects may differ due to their focus on a country where the youth is much more reliant on debt. On the other hand, the variation exploited raises several endogeneity concerns.

The results presented here support the formal inclusion of financial education content in the school curricula, especially as it does not seem to hinder academic performance. One of the strengths of the pilot implemented in Peru is the high level of compliance with the training and delivery of the lessons among teachers. However, the inclusion of financial education content in the curricula could further improve teachers’ compliance and solve coordination problems between teachers and principals to incorporate the material. The ITT effects thus constitute a lower bound of the effect that these programmes could have if they were to be included as a mandatory course or course portion, subject to regular evaluation.

Spatial Distribution of Control and Treatment Schools.

Note: Intervention regions are highlighted grey.

Note: Intervention regions are highlighted grey.

Financial Literacy Lessons and Intensity of Exposure by Grade.

Note: Exposure information reflects the suggested guidelines provided by the MINEDU to all HGE teachers in treatment schools during the first year of the pilot, 2016.

Hours of Exposure to Financial Education in School-Based Programmes Targeting Children and the Youth.

Note: Experimental studies targeting high school students are highlighted in bold .

Balance Check in the Endline Sample: Student Characteristics.

Notes: Data from the baseline survey and exam for the sample of students present at the exit survey and exam. Test for joint covariates orthogonality |$p\text{-value}=0.5269$|⁠ . Significance levels (*10%; **5%; ***1%) captured through OLS estimation accounting for clustered (school) standard errors. Standard errors (deviations) of coefficients (control means) are given in parentheses.

Balance Check in the Baseline Sample: Student Characteristics.

Notes: Data from the baseline survey and exam for the sample of students present at baseline. Test for joint covariates orthogonality |$p\text{-value}=0.5144$|⁠ . Significance levels (*10%; **5%; ***1%) captured through OLS estimation accounting for clustered (school) standard errors. Standard errors (deviations) of coefficients (control means) are given in parentheses.

Balance Check: Teacher Characteristics.

Notes: Data come from the exit survey and exam. Test for joint covariates orthogonality |$p\text{-value}=0.5628$|⁠ . Significance levels (*10%; **5%; ***1%) captured through OLS estimation accounting for clustered (school) standard errors. Standard errors (deviations) of coefficients (control means) are given in parentheses.

Determinants of Attrition between Baseline and Endline Surveys.

Notes: Financial literacy exam score is standardised by grade relative to the control group in the original experimental sample of 300 schools. *significant at 10%; **significant at 5%; ***significant at 1%. OLS estimates, standard errors clustered at the school level are reported in parentheses. All specifications include a set of dummy variables that correspond to the matched pairs of schools.

Share of Missing Data by Construct and Survey Round.

Notes: Significance levels (*10%; **5%; ***1%) captured through OLS estimation accounting for clustered (school) standard errors. Standard errors (deviations) of coefficients (control means) are given in parentheses.

Effects on Students’ Academic Outcomes.

Notes: GPAs are measured at the end of the 2016 academic year and standardised by grade relative to the control group in the original experimental sample of 300 schools. Grade progression is a binary variable indicating if the student was promoted to the next grade at the end of the 2016 academic year (graduated in the case of 11th grade students). School pairs with incomplete survey records for at least one school are excluded from estimation. Asterisks denote significance levels (*10%; **5%; ***1%) based on unadjusted p -values. Daggers denote significance levels based on the Romano–Wolf adjusted p -values ( ⁠|$^{\dagger}$| 10%, |$^{\dagger \dagger}$| 5%, |$^{\dagger \dagger \dagger}$| 1%) resulting from 1,000 bootstrap replications. Correction for multiple testing implemented for all GPA outcomes, grade progression and university aspirations. OLS estimates, standard errors clustered at the school level are reported in parentheses. All specifications include a set of dummy variables that correspond to the matched pairs of schools and the following set of controls: grade, sex, currently working, received financial education lessons in the past, ratio of household members to bedrooms, asset index, high level of parental supervision, lives with both parents and has dinner with parents each day of the week. The models for grades also include the value of the dependent variable at the end of the 2015 academic year as a control.

ATT Effect on Students’ Financial Literacy and Financial Behaviour.

Effects on students’ credit and delinquency outcomes: inverse hyperbolic sine transformation..

Notes: Students’ credit and default outcomes measured in June 2019. Current debt and debt in arrears are measured using the inverse hyperbolic sine transformation. The first three columns focus on the full sample, while the last three columns condition on the subsample of students who had an outstanding loan in June 2019. School pairs with incomplete survey records for at least one school are excluded from estimation. Asterisks denote significance levels (*10%; **5%; ***1%) based on unadjusted p -values. Daggers denote significance levels based on the Romano–Wolf adjusted p -values ( ⁠|$^{\dagger}$| 10%, |$^{\dagger \dagger}$| 5%, |$^{\dagger \dagger \dagger}$| 1%) resulting from 1,000 bootstrap replications. Correction for multiple testing implemented for current debt and debt arrears in loans. OLS estimates, standard errors clustered at the school level are reported in parentheses. All specifications include a set of dummy variables that correspond to the matched pairs of schools and the following set of controls: grade, sex, currently working, received financial education lessons in the past, ratio of household members to bedrooms, asset index, high level of parental supervision, lives with both parents and has dinner with parents each day of the week.

ATT Effect on Teachers’ Financial Literacy and Financial Behaviour.

Notes: All outcomes are measured at the end of the 2016 academic year. Scores in the financial literacy exams are standardised at the grade level, using the distribution of the control group in the baseline exam as a benchmark. The financial autonomy index aggregates 15 binary variables capturing whether teachers felt empowered, confident and capable of making independent financial choices and influencing their households’ financial decisions. The probability of saving captures both formal and informal savings decisions. Savings balances are expressed in US dollars. The financial savviness index aggregates four binary variables measuring if the teacher keeps a budget, saves before buying something that cannot be afforded, compares prices and bargains before shopping. The financial autonomy and financial savviness indexes are computed as an equally weighted average of the z -scores of each of its components. These z -scores are obtained by subtracting the control group mean and dividing by the control group SD. School pairs with incomplete survey records for at least one school are excluded from estimation. Asterisks denote significance levels (*10%; **5%; ***1%) based on unadjusted p -values. Daggers denote significance levels based on the Romano-Wolf adjusted p -values ( ⁠|$^{\dagger}$| 10%, |$^{\dagger \dagger}$| 5%, |$^{\dagger \dagger \dagger}$| 1%) resulting from 1,000 bootstrap replications. Correction for multiple testing implemented for financial literacy, financial autonomy, probability of saving and financial savviness. OLS estimates, standard errors clustered at the school level are reported in parentheses. All specifications include a set of dummy variables that correspond to the matched pairs of schools and the following set of controls: sex, type of contract, total hours teaching, experience, degree in social sciences and postgraduate studies.

Determinants of the Probability of Teaching the Financial Education Lessons.

Notes: Significance levels (*10%; **5%; ***1%). OLS estimates, standard errors clustered at the school level are reported in parentheses. Sample of teachers in the treatment group. Based on teachers’ self-reports, covering most lessons implies covering at least 50% of the material in the workbooks, while covering some lessons implies covering at least one lesson of the curriculum.

Additional Supporting Information may be found in the online version of this article:

Online Appendix

Replication Package

The data and codes for this paper are available on the Journal repository. They were checked for their ability to reproduce the results presented in the paper. The replication package for this paper is available at the following address: https://doi.org/10.5281/zenodo.7304670 .

I am grateful to Maria del Pilar Biggio, Hans Landolt, Juan Carlos Chong and Elizabeth Cavero for their support during the implementation and fieldwork phases. I thank the editor and three anonymous referees for very detailed and constructive comments as well Miriam Bruhn, Alejandro Ganimian, Tim Kaiser, Laura Hospido, Lukas Menkhoff, Silvia Prina, Diego Rivetti, Carly Urban, Diego Vera, Bruce Wydick and audiences at various conferences, workshops and seminars for very helpful discussions and suggestions. I also thank Nelson Oviedo and Alejandro Herrera for excellent research assistance. Financial support from the Inter-American Development Bank (IDB) is gratefully acknowledged. This study is registered in the AEA RCT Registry and the unique identifying number is AEARCTR-0004719. All data collection activities were conducted once the Chesapeake Institutional Review Board (IRB) determined that the evaluation activities were exempt from IRB oversight (protocol number Pro00016325).

Alan and Ertac ( 2018 ) is a notable exception among the experimental studies as it moves beyond survey records and relies on incentivised time preference elicitation tasks both in the short run as well as three years after the delivery of the treatment. However, the authors were not able to look at actual financial behaviour as their sample corresponds to elementary school children.

The sample of Cole et al . ( 2016 ) covers the age range 35–54, while Brown et al . ( 2016 ) focused on individuals aged 19 through 29. Urban et al . ( 2020 ) focused on subjects aged between 18 and 20, but 35% of 18–19-year-olds in their sample have a credit history.

Relative to its neighbours, Peru has been a pioneer in promoting the development of financial skills in school. It was the first country in the Latin American and Caribbean region to include financial education in the national curriculum as early as 2009. Under the curriculum, financial skills are to be developed to fulfil one of the 29 competencies that basic education seeks to provide: ‘responsibly manages economic resources’. These efforts were further consolidated with the PLANEF, which was jointly developed by the SBS and the MINEDU. The strategy focused on five basic action areas: payments, savings, borrowing, insurance and consumer protection.

See Table  A1 in Appendix   A . Compared to other school-based interventions targeting the youth, the pilot in Peru provides a very high intensity treatment in terms of hours of exposure, surpassed only by the programme studied in Bruhn et al . ( 2016 ), which is a clear outlier with an average of 108 hours of teaching required to deliver all the material included in the programme’s textbooks. In comparison, the Peruvian programme was more compact, but the number of hours of exposure surpassed most of the other programmes targeting the youth that have been experimentally evaluated. See Table  A2 in Appendix   A .

To establish the number of schools required for the evaluation, power calculations were performed with the following parameters: significance level of 0.05, statistical power of 0.8, minimum detectable effect of 0.1 SDs, |$R^2$| of the outcome equation of 0.1, intra-cluster correlation of 0.1 and a sample size of 40 students per grade. Under these assumptions, 300 schools were required, 150 in each treatment arm.

The Mahalanobis’ distance is minimised for 10 selected characteristics: electricity connection; water and drainage services availability; presence of a principal; number of desks in good condition; number of teachers; numbers of students in the 9th, 10th and 11th grades; dropout rate; passing rate and whether the school belongs to the experimental sample of any other ongoing pilot.

Table  A3 in Appendix   A presents the balance check for the endline sample. Because the survey questionnaires were self-rated, higher levels of missing data are expected relative to face-to-face application through a surveyor. As shown in Table  A7 in Appendix   A , the share of missing records varies depending on the construct and the survey round; however, it is not significantly different by treatment arm.

Lenders observe negative records in non–credit-related bills when they search for potential borrowers in the database. They directly incorporate this information and the records on late/missed payments of loans in their own risk assessment models. In fact, several financial institutions, particularly microcredit institutions, require lack of negative records to be eligible as a client. Negative signals originating from credit card debt, non–credit-related bills and arrears/default in loans are all incorporated in the credit scoring models developed by EQUIFAX.

While ‘comparing prices’ and ‘bargaining before shopping’ are indicators of potential improved consumer welfare due to a greater likelihood to pay better final prices, ‘saving before buying something that cannot be afforded’ may not always improve financial well-being, particularly if there are investment opportunities that can be missed. However, given the young age of the students at baseline, it is not very likely that they face such situations. Survey data indicate that students’ expenditures are mostly allocated to clothing, school supplies and household staples.

As mentioned in Subsection 1.3 , students in the sample perceive non-negligible incomes, even when they are not working. Detailed high-frequency data from a financial diaries study with a subsample of the experimental sample in Piura shows that the youth have active and modestly sophisticated financial lives. Over a period of 6 months, the average youth records an average of 14 monthly financial transactions. While transactions related to expenses represent over half of the total recorded transactions, income flows and financial tools (savings and loan operations) represent 38.1% and 9.7% of the recorded transactions, respectively. In terms of magnitude, income flows represent the largest share of youth’s budget, with 46.2% of the total transactional value recorded over the entire six-month period (Frisancho et al ., 2021 ).

For instance, Barber and Turner ( 2007 ) showed that newly qualified teachers working in primary schools experience an increase in confidence in relation to special educational needs and report feeling more skilled in this area by the end of their first year of teaching. Moreover, Perkins et al . ( 2015 ) studied the effects that teaching other adults can have on instructors’ skills in the context of a beginner programme delivering music lessons in the UK. The authors showed that the teachers reformulated the ways in which they thought about teaching music to adult learners and developed teaching skills relevant to a wide range of teaching contexts.

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Bringing Personal Finance to the Classroom for Generation Z

Twenty-three states require high schoolers to take the subject, and more could join them in an effort to boost the next generation’s financial literacy.

articles financial education

By Ann Carrns

The number of states requiring high schoolers to learn about personal money matters continued to tick higher in 2021, and another — Florida — is poised to join the group shortly.

Over the past two years, the addition of Nebraska and New Mexico raised the number to 23, according to a report published Thursday by the Council for Economic Education, a nonprofit group that promotes education in both economics and personal finance.

In Florida, the Legislature has approved a bill requiring students to take a full semester course in personal finance before graduating, and Gov. Ron DeSantis is “excited” for it to arrive at his desk, a spokesman said. (High schools in Florida already have to offer a course as an elective .)

Financial concerns were heightened by the pandemic , and rising inflation is straining household budgets. Those factors, combined with persistent worries about burdensome student debt levels and shaky retirement security, have created a stronger case for making personal money skills a priority for high schoolers, who are soon to make decisions about college loans or finding a job, advocates for financial literacy say.

“The need has never been greater,” said Annamaria Lusardi, founder and academic director of the Global Financial Literacy Excellence Center at George Washington University. “We owe it to this young generation to be well prepared for the future.”

Financial literacy — a working grasp of concepts like saving, credit, interest rates, investing and risk assessment — is generally low among American adults, especially younger adults, according to a recent report from the excellence center and the Teachers Insurance and Annuity Association of America Institute. Two-thirds of Generation Z adults, for example, couldn’t correctly answer more than half the financial questions in the center’s survey, which compared financial literacy across five generations. (Members of Gen Z were born between 1997 and 2012; its oldest members are now 25.)

“The pandemic has shown a critical need for the average American to have these skills,” said Tim Ranzetta, co-founder of Next Gen Personal Finance, a nonprofit that develops and funds personal finance instruction materials for schools.

State-level surveys conducted for Next Gen have found strong support for high school personal finance requirements, Mr. Ranzetta said, and dozens of proposals are awaiting action in state legislatures. It’s uncertain how many will become law, but a requirement in a large state like Florida, he said, may help propel other states’ efforts.

“There will be a FOMO effect,” he said, using the acronym for “fear of missing out.”

Advocates of financial literacy say state requirements help ensure that all students, regardless of their income or race, are able to learn essential money skills. According to the TIAA Institute’s report, financial literacy for Gen Z tends to be lowest among those who are not currently attending or have never attended college.

“When it’s mandated, everyone receives access,” said Rebecca Maxcy, director of the Financial Education Initiative at the University of Chicago.

While the progress among states is encouraging, there is more to do, said Nan J. Morrison, president and chief executive of the Council for Economic Education. Currently, just nine of the 23 states require personal finance to be taken as a stand-alone course. Others permit the subject to be combined with other classes, like math or social studies, or provide other ways for students to opt out of the course, which may dilute its impact.

Along with the new report, the council announced the creation, along with Visa, of a coalition of businesses and nonprofit groups, called FinEd50 , to help promote “guaranteed access” to personal finance courses in all states.

Here are some questions and answers about financial literacy education:

Don’t students learn about personal finance as part of economics courses?

Sometimes. But growth in state requirements for economics instruction has stalled. Two years ago, 25 states required a high school course in economics, and that number hasn’t budged, the Council for Economic Education’s report found. And two states have recently considered removing requirements for studying economics.

“We’re actually kind of worried about this,” Ms. Morrison said.

She said the council would take a closer look at why efforts to expand economics education had stagnated. Students need an understanding of both economics and personal finance, she said, “to successfully navigate their lives” as individuals and as members of increasingly complex societies.

Is financial literacy instruction in high school effective?

There has been debate over what works, with some studies suggesting that financial education has limited effect on behavior, or that students may be better off simply learning more math . But more recent research suggests that high school personal finance lessons can help young people make better financial decisions.

A study published in 2020 led by a researcher at Montana State University found that financial education requirements were linked to fewer defaults and higher credit scores among young adults. And a 2019 study from the University of Wisconsin-Madison found that mandates “significantly reduced” the likelihood of borrowing high-interest payday loans. As with any subject, Professor Lusardi said, effective instruction requires a high-quality curriculum and well-trained teachers.

Instruction should be relevant to the students, Ms. Morrison said. Talks about part-time jobs that emphasize mowing lawns, for instance, may not resonate with high school students in urban settings, she said.

Mr. Ranzetta said that while some people might balk, courses for high school students should include discussion of new financial tools, like payment and trading apps and digital money, because students are already hearing about them.

“You better be talking about cryptocurrency,” he said.

How can I tell if the personal finance instruction at my local high school is high quality?

The Financial Education Initiative at the University of Chicago has created tool kits to help parents and teachers evaluate instructional materials on personal finance and advocate their inclusion in the classroom. The kits include questions that can help identify effective programs, with suggestions to ask whether the materials contain marketing for financial institutions or products, for example, or if an independent evaluator has examined them.

Inside the World of Gen Z

The generation of people born between 1997 and 2012 is changing fashion, culture, politics, the workplace and more..

With active lawsuits in five states, TikTok videos that mix humor and outrage, and marches in the streets, Gen Z is taking on climate change .

We asked Gen Z-ers to tell us about their living situations and the challenges of keeping a roof over their heads. Here’s what they said .

Ready for the Nu Metal renaissance? Bands like Deftones and Slipknot are resonating with younger fans , thanks to TikTok, the Y2K revival and, of course, enduring teenage angst.

What is it like to be part of the group that has been called the most diverse generation in U.S. history? Here is what 900 Gen Zers had to say .

Young people coming of age around the world are finding community in all sorts of places. Our “Where We Are” series takes you to some of them .

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The case for financial literacy education

Paddy Hirsch

Money. money money

Financial literacy education does not have a great reputation . It's a huge industry, spawning all sorts of books, web channels, TV shows and even social media accounts — but past studies have concluded that, for the most part, financial literacy education is kind of a waste of time .

For example, a much cited paper published in the journal Management Science found that almost everyone who took a financial literacy class forgot what they learned within 20 months, and that financial literacy has a "negligible" impact on future behavior. A trio of academics at Harvard Business School, Wellesley College and the Federal Reserve Bank of Chicago, produced a working paper that showed that mandated Finlit classes given to high schoolers made no difference to the students' ability to handle their finances. And the list goes on .

The name that comes up again and again in these papers and reports on financial literacy is Annamaria Lusardi. She is a professor of economics and accountancy at the George Washington University School of Business. She's also the founder and academic director of the Global Financial Literacy Excellence Center at GWU. She and Olivia Mitchell, a professor at the University of Pennsylvania's Wharton School of Business, published a paper in 2013 that amounted to a study of studies about financial literacy , and it was quite critical of the way financial literacy programs are taught. This study of studies has been widely quoted ever since.

New Hope For Financial Dullards

Ten years later, Lusardi and Mitchell are out with a new paper, similarly titled , but much more upbeat. "The Importance of Financial Literacy: Opening A New Field," picks up where their 2013 study of studies left off, and it draws on the two women's experience teaching personal finance.

The first thing they establish is that the level of financial literacy, globally, is just as woeful as it was when they released their seminal paper ten years ago. To establish this, they conducted a survey that asked participants three questions, which focus on interest rates, inflation and risk diversification.

"These are simple questions," Lusardi says, "Yet they test for basic and fundamental knowledge at the basis of most economic decisions. In addition, answering these questions does not require difficult calculations, as we do not test for knowledge of mathematics but rather for an understanding of how interest rates and inflation work. The questions also test knowledge of the language of finance."

How did respondents do? Let's just say there is room for improvement. (You can test your own knowledge by checking out the paper ).

"Only 43% of the respondents (in the US) are able to answer all of the questions correctly," Lusardi says, adding that the level of financial illiteracy is particularly acute amongst women. "Only 29% of women answer all three questions correctly, versus 48% of men," she says, adding that this gender difference is strikingly stable across the 140 countries that they ran the test in.

"We also see ... that women are much more likely than men to respond that they do not know/refuse to answer at least one financial literacy question," she says. Such gender differences are likely to be the result of lack of self-confidence, in addition to lack of knowledge."

Young people are also more likely to be disadvantaged in this area, Lusardi and Mitchell found, as are people of color. "The young display very low financial literacy, with only one-third being able to answer all three questions correctly. Half of Whites could correctly answer all three questions, versus only 26% of Blacks and 22% of Hispanics."

This is a problem, Lusardi says, not just because it means that many people are ill equipped to handle an increasingly complicated and complex financial landscape that can impact their earnings and long-term wealth. There are obvious social implications to the fact that white males appear to have a significant edge on the rest of the population in this area. And if that isn't enough, Lusardi says, it's also a problem for the economy.

"On average, Americans spend seven hours per week dealing with personal finance issues, three of which are at work. People with low financial literacy spend double that amount," she says. The impact on productivity of people spending most of an entire working day on their personal finances whilst at work is considerable, she goes on. Add in the consequences of mismanagement of assets, investments, mortgages and other debt, and there is a significant potential effect on the economy.

Lusardi says this idea, that the damage wrought by a lack of financial literacy might extend beyond the individual — to companies and even to the economy has not escaped the notice of governments.

"Influential policymakers and central bankers, including former Fed Chairman, Ben Bernanke, have ... spoken to the critical importance of financial literacy," the paper says. "Additionally, the European Commission has recently acknowledged the importance of financial literacy as a key step for a capital markets union. Some governments have ... implemented financial literacy training in high schools. Several years ago, the Council for Economic Education (CEE 2013) established National Standards for Financial Literacy, detailing what should be covered in personal finance courses in school."

Fixing The Flaws

A decade ago, Lusardi and Mitchell were somewhat critical of the financial literacy courses offered by companies and schools. The programs were generally not effective, they said, not because the concept of personal finance education was flawed per se, but because the various programs were generally not well resourced, and often poorly conceived.

"Most of these (courses) in the US were unfunded," Lusardi says. "There was no curriculum. There were no materials, and teachers were hardly trained. So the gym teacher was teaching financial literacy, or anybody they could find. This is, of course, not going to work. It wouldn't work for any topic. If you have a course in French and the teacher doesn't speak good French, (students) are probably not going to learn good French either."

Moreover, the classes, whether taught in schools or in corporate offices, tended to provide one-shot, one-size-fits-all instructions, with little or no follow-up. Lusardi says that was a recipe for failure. But those organizations that have recognized the need for financial literacy programs, and that have persisted in developing them, have made progress, she says.

"Many programs have moved beyond very short interventions, such as a single retirement seminar or sending employees to a benefits fair, to more robust programs," Lusardi says. "Financial literacy has now become an official field of study in the economics profession. Many initiatives at national levels have been launched, and more than 80 countries have set up national committees entrusted with the design and implementation of national strategies for financial literacy."

Lusardi says it's particularly important to teach and consolidate principles of good personal finance as early as possible, which means starting at home — where children are likely to model good financial habits — and in school. To that end, the Programme for International Student Assessment in 2012 added financial literacy to the set of topics that 15-year-old students need to know to be able to participate in modern society and be successful in the labor market.

Lusardi says that in the decade since she and Mitchell released their 2013 report, their experience teaching financial literacy has proved that these programs, properly taught, can work.

"Our research shows that much can be done to help people make savvier financial decisions," she says, noting that a successful course will help people grasp key fundamental financial concepts, particularly financial risk and risk management. It will help them understand the workings of specific financial instruments and contracts, such as student loans, mortgages, credit cards, investments, and annuities. It will also make them aware of their rights and obligations in the financial marketplace.

Most importantly of all, of course, it will attract and retain the students' interest, which isn't always easy in the dry world of finance.

"I teach very differently now because of my research," Lusardi says. "I say, what do you think this course is about? And as you can imagine, most of the students think it's about investing in the stock market. That's what personal finance is associated with. And I tell them, 'No, this is a happiness project. We talk about all of the decisions that are fundamental and important in your life. And I want to teach you to make them well, because if you do, you are going to be happy.'"

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FINANCIAL LITERACY, FINANCIAL EDUCATION AND ECONOMIC OUTCOMES

In this article we review the literature on financial literacy, financial education, and consumer financial outcomes. We consider how financial literacy is measured in the current literature, and examine how well the existing literature addresses whether financial education improves financial literacy or personal financial outcomes. We discuss the extent to which a competitive market provides incentives for firms to educate consumers or offer products that facilitate informed choice. We review the literature on alternative policies to improve financial outcomes, and compare the evidence to evidence on the efficacy and cost of financial education. Finally, we discuss directions for future research.

“The future of our country depends upon making every individual, young and old, fully realize the obligations and responsibilities belonging to citizenship...The future of each individual rests in the individual, providing each is given a fair and proper education and training in the useful things of life...Habits of life are formed in youth...What we need in this country now...is to teach the growing generations to realize that thrift and economy, coupled with industry, are necessary now as they were in past generations.”
--Theodore Vail, President of AT&T and first chairman of the Junior Achievement Bureau (1919, as quoted in Francomano, Lavitt and Lavitt, 1988 )
“Just as it was not possible to live in an industrialized society without print literacy—the ability to read and write, so it is not possible to live in today's world without being financially literate... Financial literacy is an essential tool for anyone who wants to be able to succeed in today's society, make sound financial decisions, and—ultimately—be a good citizen.”
-- Annamaria Lusardi (2011)

1. INTRODUCTION

Can individuals effectively manage their personal financial affairs? Is there a role for public policy in helping consumers achieve better financial outcomes? And if so, what form should government intervention take? These questions are central to many current policy debates and reforms in the U.S. and around the world in the wake of the recent global financial crises.

In the U.S., concerns about poor financial decision making and weak consumer protections in consumer financial markets provided the impetus for the creation of the Consumer Financial Protection Bureau (CFPB) as part of the Dodd-Frank Wall Street Reform and Consumer Project Act which was signed into law by President Obama on July 21, 2010. This law gives the CFPB oversight of consumer financial products in a variety of markets, including checking and savings accounts, payday loans, credit cards, and mortgages (CFPB authority does not extend to investments such as stocks and mutual funds which are regulated by the SEC, or personal insurance products that are largely regulated at the state level). In addition to establishing its regulatory authority, the Dodd-Frank Act mandates that the CFPB establish “the Office of Financial Education, which shall develop a strategy to improve the financial literacy of consumers.” It goes on to state that the Comptroller must study “effective methods, tools, and strategies intended to educate and empower consumers about personal financial management” and make recommendations for the “development of programs that effectively improve financial education outcomes.” 1

In line with this second mandate for the CFPB, there has been much recent public discussion on financial literacy and the role of financial education as an antidote to limited individual financial capabilities. As the title suggests, this is a main focus of the current paper; however, it is important not to lose the forest for the trees in the debate on policy prescriptions. The market failure that calls for a policy response is not limited to financial literacy per se, but the full complement of conditions that lead to suboptimal consumer financial outcomes of which limited financial literacy is one contributing factor. Similarly, the policy tools for improving consumer financial outcomes include financial education but also encompass a wide variety of regulatory approaches. One of our aims in this paper is to place financial literacy and financial education in this broader context of both problems and solutions.

The sense of public urgency over the level of financial literacy in the population is, we believe, a reaction to a changing economic climate in which individuals now shoulder greater personal financial responsibility in the face of increasingly complicated financial products. For example, in the U.S. and elsewhere across the globe, individuals have been given greater control and responsibility over the investments funding their retirement (in both private retirement savings plan such as 401(k)s and in social security schemes with private accounts). Consumers confront ever more diverse options to obtain credit (credit cards, mortgages, home equity loans, payday loans, etc.) and a veritable alphabet soup of savings alternatives (CDs, HSAs, 401(k)s, IRAs, 529s, KEOUGHs, etc.). Can individuals successfully navigate this increasingly complicated financial terrain?

We begin by framing financial literacy within the context of standard models of consumer financial decision making. We then consider how to define and measure financial literacy, with an emphasis on the growing literature documenting the financial capabilities of individuals in the U.S. and other countries. We then survey the literature on the relationship between financial literacy and economic outcomes, including wealth accumulation, savings decisions, investment choices, and credit outcomes. We then assess the evidence on the impact of financial education on financial literacy and on economic outcomes. Next we evaluate the role of government in consumer financial markets: what problems do limited financial capabilities pose, and are market mechanisms likely to correct these problems? Finally, we suggest directions for future research on financial literacy, financial education, and other mechanisms for improving consumer financial outcomes.

2. WHAT IS FINANICAL LITERACY AND WHY IS IT IMPORTANT?

“Financial literacy” as a construct was first championed by the Jump$tart Coalition for Personal Financial Literacy in its inaugural 1997 study Jump$tart Survey of Financial Literacy Among High School Students. In this study, Jump$tart defined “financial literacy” as “the ability to use knowledge and skills to manage one's financial resources effectively for lifetime financial security.” As operationalized in the academic literature, financial literacy has taken on a variety of meanings; it has been used to refer to knowledge of financial products (e.g., what is a stock vs. a bond; the difference between a fixed vs. an adjustable rate mortgage), knowledge of financial concepts (inflation, compounding, diversification, credit scores), having the mathematical skills or numeracy necessary for effective financial decision making, and being engaged in certain activities such as financial planning.

Although financial literacy as a construct is a fairly recent development, financial education as an antidote to poor financial decision making is not. In the U.S., policy initiatives to improve the quality of personal financial decision making through financial education extend back at least to the 1950s and 1960s when states began mandating inclusion of personal finance, economics, and other consumer education topics in the K-12 educational curriculum ( Bernheim et al. 2001 ; citing Alexander 1979, Joint Council on Economic Education 1989, and National Coalition for Consumer Education 1990). 2 Private financial and economic education initiatives have an even longer history; the Junior Achievement organization had its genesis during World War I, and the Council for Economic Education goes back at least sixty years. 3

Why are financial literacy and financial education as a tool to increase financial literacy potentially important? In answering these questions, it is useful to place financial literacy within the context of standard models of consumer financial decision making and market competition. We start with a simple two-period model of intertemporal choice in the face of uncertainty. A household decides between consumption and savings at time 0, given an initial time 0 budget, y , an expected real interest rate, r , and current and future expected prices, p , for goods consumed, x .

Solving this simple model requires both numeracy (the ability to add, subtract, and multiply), and some degree of financial literacy (an understanding of interest rates, market risks, real versus nominal returns, prices and inflation).

Alternatively, consider a simple model of single-period profit maximization for a single-product firm competing on price in a differentiated products market:

The firm chooses price, p , to maximize profits given marginal costs, mc , its product characteristics, x , its competitors’ prices and product characteristics, p -j and x -j , respectively, and the distribution of consumer preferences over price and product characteristics, θ . Doing so results in the familiar formula relating price mark-up over costs to the price elasticity of demand: prices are higher relative to costs in product markets in which demand is less sensitive to price.

Competitive outcomes in this model rest on the assumption that individuals can and do make comparisons across products in terms of both product attributes and the prices paid for those attributes. This may be a relatively straightforward task for some products (e.g., breakfast cereal), but is a potentially tall order for products with multidimensional attributes and complicated and uncertain pricing (e.g., health care plans, cell phone plans, credit cards, or adjustable rate mortgages).

A lack of financial literacy is problematic if it renders individuals unable to optimize their own welfare, especially when the stakes are high, or to exert the type of competitive pressure necessary for market efficiency. This has obvious consequences for individual and social welfare. It also makes the standard models used to capture consumer behavior and shape economic policy less useful for these particular tasks.

Research has documented widespread and avoidable financial mistakes by consumers, some with non-trivial financial consequences. For example, in the U.S., Choi et al. (2011) examine contributions to 401(k) plans by employees over age 59 ½ who are eligible for an employer match, vested in their plan, and able to make immediate penalty-free withdrawals due to their age. They find that 36% of these employees either don't participate or contribute less than the amount that would garner the full employer match, essentially foregoing 1.6% of their annual pay in matching contributions; the cumulative losses over time for these individuals are likely to be much larger.

Duarte & Hastings (2011) and Hastings et al. (2012) show that many participants in the private account Social Security system in Mexico invest their account balances with dominated financial providers who charge high fees that are not offset by higher returns, contributing to high management fees in the system overall. Similarly, Choi et al. (2009) use a laboratory experiment that show that many investors, even those who are well educated, fail to choose a fee minimizing portfolio even in a context (the choice between four different S&P 500 Index Funds) in which fees are the only significant distinguishing characteristic of the investments and the dispersion in fees is large.

Campbell (2006) highlights several other of financial mistakes: low levels of stock market participation, inadequate diversification due to households’ apparent preferences to invest in local firms and employer stock, individuals’ tendencies to sell assets that have appreciated while holding on to assets whose value has declined even if future return prospects are the same (the disposition effect first documented in Odean 1998 ), and failing to refinance fixed rate mortgages in a period of declining interest rates.

Other financial mistakes discussed in the literature include purchasing whole life insurance rather than a cheaper combination of term life insurance in conjunction with a savings account ( Anagol et al. 2012 ); simultaneously holding high-interest credit card debt and low-interest checking account balances ( Gross & Souleles 2002 ); holding taxable assets in taxable accounts and non-taxable or tax-preferred assets in tax-deferred accounts ( Bergstresser & Poterba 2004 , Barber & Odean 2003 ); paying down a mortgage faster than the amortization schedule requires while failing to contribute to a matched tax-deferred savings account (Amromin et al. 2007); and borrowing from a payday lender when cheaper sources of credit are available ( Agarwal et al. 2009b ).

Agarwal et al. (2009a) document the prevalence of several different financial mistakes ranging from suboptimal credit card use after making a balance transfer to an account with a low teaser rate, to paying unnecessarily high interest rates on a home equity loan or line of credit. They find that across many domains, sizeable fractions of consumers make avoidable financial mistakes. They also find that the frequency of financial mistakes varies with age, following a U-shaped pattern: financial mistakes decline with age until individuals reach their early 50s, then begin to increase. The declining pattern up to the early 50s is consistent with the acquisition of increased financial decision-making capital over time, either formally or through learning from experience ( Agarwal et al. 2011 ); but the reversal at older ages highlights the natural limits that the aging process places on individuals’ financial decision-making capabilities, however those capabilities are acquired.

The constellation of findings described above has been cited by some as prima facie evidence that individuals lack the requisite levels of financial literacy for effective financial decision making. On the other hand, Milton Friedman (1953) famously suggested that just as pool players need not be experts in physics to play pool well, individuals need not be financial experts if they can learn to behave optimally through trial and error. There is some evidence that such personal financial learning does occur. Agarwal et al. (2011) find that in credit card markets during the first three years after an account is opened, the fees paid by new card holders fall by 75% due to negative feedback: by paying a fee, consumers learn how to avoid triggering future fees. The role of experience is also evident in the answers to a University of Michigan Surveys of Consumers question that asked about the most important way respondents’ learned about personal finance. Half cited personal financial experience, more than twice the fraction who cited friends and family, and four to five times the fraction who credit formal financial education as their most important source of learning (Hilgert & Hogarth 2003).

Although experiential learning may be an important self-correcting mechanism in financial markets, many important financial decisions like saving and investing for retirement, choosing a mortgage, or investing in an education, are undertaken only infrequently and have delayed outcomes that are subject to large random shocks. Learning by doing may not be an effective substitute for limited financial knowledge in these circumstances ( Campbell et al. 2010 ), and consumers may instead rely on whatever limited institutional knowledge and numeracy skills they have.

3. MEASURING FINANCIAL LITERACY

If financial literacy is an important ingredient in effective financial decision making, a natural question to ask is how financially literate are consumers? Are they well equipped to make consequential financial decisions? Or do they fall short? Efforts to measure financial literacy date back to at least the early 1990s when the Consumer Federation of America (1990; 1991; 1993; 1998) began conducting a series of “Consumer Knowledge” surveys among different populations which included questions on several personal finance topics: consumer credit, bank accounts, insurance, and major consumer expenditures areas such as housing, food and automobiles. The 1997 Jump$tart survey of high school students referenced above has been repeated biennially since 2000 and was expanded to include college students in 2008 (see Mandell 2009 , for an analysis these surveys). Hilgert et al. (2003) analyze a set of “Financial IQ” questions included in the University of Michigan's monthly Surveys of Consumers in November and December 2001.

More recently, Lusardi & Mitchell (2006) added a set of financial literacy questions to the 2004 Health and Retirement Study (HRS, a survey of U.S. households aged 50 and older) that have, in the past decade, served as the foundational questions in several surveys designed to measure financial literacy in the U.S. and other countries. The three core questions in the original 2004 HRS financial literacy module were designed to assess understanding of three core financial concepts: compound interest, real rates of return, and risk diversification (see Table 1 ). Because these questions are parsimonious and have been widely replicated and adapted, they have come to be known as the “Big Three.”

Financial Literacy Questions in the 2004 Health and Retirement Study (HRS) and the 2009 National Financial Capability Study (NFCS)

Note: The answer categorized as correct is italicized in the last column.

These questions were incorporated into the 2009 National Financial Capability Study (NFCS) in the U.S., a large national survey of the financial capabilities of the adult population. 4 The NFCS asked two additional financial literacy questions which, together with the “Big Three,” have collectively come to be known as the “Big Five.” These two additional questions test knowledge about mortgage interest and bond prices. Table 1 lists the “Big Five” questions as asked with their potential answers (the correct answers are italicized).

Because the “Big Three” questions have been more widely adopted in other surveys, we focus here on the answers to these three questions, although we return to the “Big Five” later. The second and fourth columns of Table 2 report the percent of correct and “Don't know” responses to each of the “Big Three” questions for the 2004 HRS respondents and the 2009 NFCS respondents. Because the NFCS represents the entire adult population, we focus on those results here. Among respondents to the 2009 NFCS, 78% correctly answered the first question on interest rates and compounding, 65% correctly answered the second question on inflation and purchasing power, and 53% correctly answered the third question on risk diversification. Note that all three questions were multiple choice (rather than open-ended), so that guessing would yield a correct answer to the first two questions 33% of the time and to the last question 50% of the time. Only 39% of respondents correctly answered all three questions.

Financial Literacy Around the World

Notes: Countries ranked by 2010-2011 International Monetary Fund GDP per capita. + denotes statistics directly drawn from publications: Netherlands: van Rooij et al. 2011 . Financial literacy and retirement preparation in the Netherlands. J. Pension. Econ. 10(4): 527-545; Japan: Sekita. 2011. Financial literacy and retirement planning in Japan. J. Pension. Econ. 10(4): 637-656. Germany: Lusardi & Bucher-Koenen. 2011. Financial literacy and retirement planning in Germany. J. Pension. Econ. 10(4): 565-584. Cole et al. 2011. Prices or knowledge? What drives demand for financial services in emerging markets. J. Financ. 66(6): 1933-1967.

X denotes missing information.

Clearly individuals who cannot answer the first or second questions will have a difficult time navigating financial decisions that involve an investment today and real rates of return over time; they are likely to have trouble making even the basic calculations assumed in a rational intertemporal decision-making framework. The inability to correctly answer the third question demonstrates ignorance about the benefits of diversification (reduced risk) and casts doubt on whether individuals can effectively manage their financial assets. With only 39% of the population able to answer these three fairly basic financial literacy questions correctly, we might be justifiably concerned about how many individuals make suboptimal financial decisions in everyday life and the types of marketplace distortions that could follow.

As noted earlier, dozens of surveys in addition to the NFCS have included the trio of questions discussed above from the 2004 HRS. In addition to the results for the 2004 HRS and the 2009 NFCS, Table 2 shows how respondents in several countries answered these same questions. The first six columns list comparative statistics for six developed economy surveys from the U.S., The Netherlands, Japan and Germany. The next three columns take data from the upper-middle income countries of Chile and Mexico. The last two columns report responses from the lower-income countries of India and Indonesia. Proficiency rates vary widely; in Germany, 53% of respondents correctly answer the three HRS financial literacy questions, whereas only 8% of respondents in Chile do so. In general, the level of financial literacy is highest in the developed countries and lowest in the lower-income countries. The responses to these questions in the 2004 and 2010 HRS suggest that financial literacy for HRS respondents has increased somewhat over time, perhaps from participating in the panel, or perhaps as a result of increased financial discussion surrounding the 2008 financial crisis. In Chile and Mexico, respondents have particularly low levels of financial literacy despite being responsible for managing the investment decisions for the balances accumulated in their privatized social security accounts. Chile also witnessed massive student protests over college loan debt in 2011, and yet only 16% of college entrants can correctly answer these three questions despite the fact that 22% of them are taking out student loans. 5

Although the Lusardi and Mitchell “Big Three” questions from the 2004 HRS have quickly become an international standard in assessing financial literacy, there is remarkably little evidence on whether this set of survey questions is the best approach, or even a superior approach, to measuring financial literacy. The question of how best to assess the desired behavioral capabilities remains open, both in terms of establishing whether survey questions are best-suited for the task or which questions are most effective. Longer financial literacy survey batteries do exist, including the National Financial Capability Study (NFCS) which asks the “Big Five” financial literacy questions described above along with an extensive set of questions on individual financial behaviors. The biennial Jump$tart Coalition financial literacy surveys used to assess the financial literacy of high school and college students in the U.S. include more than fifty questions. Whether using additional survey questions (and how many more) better explains individual behavior is unclear as little research has evaluated the relative efficacy of different measurements.

Table 3 lists the fraction of respondents correctly answering the “Big Three” and “Big Five” financial literacy questions in the 2009 NFCS for various demographic subgroups. There is a strong positive correlation between the performance on the “Big Three” and the “Big Five” questions (although part of this correlation is mechanical as the “Big Three” are a subset of the “Big Five”). Table 3 also lists three other self-assessed measures of financial capability (self-assessed overall financial knowledge, self-assessed mathematical knowledge and self-assessed capability at dealing with financial matters). These self-assessed measures are all highly correlated with each other, and fairly highly correlated with the performance-based measures of financial literacy in the first two columns. All of the measures of financial capability are also highly correlated with educational attainment, suggesting that traditional measures of education could also serve as proxies for financial literacy (we will discuss causality in Section 4).

Measures of Financial Literacy

Note: Authors’ calculations from the 2009 NFCS State-by-State Survey (n=28,146). The top panel of Table 1 lists the “Big 3” questions in Column (1); the “Big 5” questions in Column (2) include the “Big 3” and the additional two questions from the bottom panel of Table 1 . Columns (3) through (5) report the mean of the participants’ self-assessments based on the following scale: 1=Strongly Disagree to 7= Strongly Agree.

In a survey of 18 different financial literacy studies, Hung et al. (2009) report that the predominant approach used to operationalize the concept of financial literacy is either the number, or the fraction, of correct answers on some sort of performance test (measures akin to those in columns 1 and 2 of Table 3 ). This approach was used in all of the studies they evaluated, although two adopted a more sophisticated methodology, using factor analysis to construct an index that assigned different weights to each question ( Lusardi & Mitchell 2009 , van Rooij et al. 2011 ).

In addition to evaluating how previous studies have operationalized the concept of financial literacy, Hung et al. (2009) also perform a construct validation of seven different financial literacy measures calculated from various question batteries administered to the same set of respondents in four different waves of the RAND American Life Panel. Their measures include three performance tests (one of which has three subtests) based on either 13, 23, or 70 questions, and one behavioral outcome (performance in a hypothetical financial decision-making task). They find that the measures based on the different performance tests are highly correlated with each other, and when the same questions are asked in multiple waves, the answers have high test-retest reliability. The outcomes of the performance tests are less highly correlated with outcomes in the decision-making task. They also find that the relationship between demographics and the different performance test based measures of financial literacy is similar, but that the relationship between demographics and the outcomes in the decision-making task is much weaker. The different financial literacy measures are more variable in their predictive relationships for actual financial behaviors such as planning for retirement, saving, and wealth accumulation.

One unanswered question in this literature is whether test-based measures provide an accurate measure of actual financial capability. To our knowledge, no study has provided incentives for giving correct answers as a mechanism to encourage thoughtful answers that reflect actual knowledge; neither has any study allowed individuals to access other sources of information (e.g., the internet, or friends and family) in completing a performance test to assess whether individuals understand their limitations and can compensate for them by engaging other sources of expertise. If individuals have effective compensatory mechanisms, we may see discrepancies between performance test results and actual outcomes and behaviors in the field.

A second measure of financial literacy that has been operationalized in the literature is individuals’ self-assessments of their financial knowledge or, alternatively, the level of confidence in their financial abilities. In the 18 studies evaluated by Hung et al. (2009) discussed above, one-third analyzed self-reported financial literacy in addition to a performance test-based measure. Two issues with such self-reporting warrant mention. First, individual self-reports and actual financial decisions do not always correlate strongly ( Hastings & Mitchell 2011 , Collins et. al. 2009 ). Second, consumers are often overly optimistic about how much they actually know ( Agnew & Szykman 2005 , OECD 2005 ). Even so, in general the literature finds that self-assessed financial capabilities and more objective measures of financial literacy are positively correlated (e.g., Lusardi & Mitchell 2009 , Parker et al. 2012 ), and self-reported financial literacy or confidence often have independent predictive power for financial outcomes relative to more objective test-based measures of financial literacy. For example, Allgood & Walstad (2012) find that in the 2009 NFCS State-by-State survey, both self-assessed financial literacy and the fraction of correct answers on the “Big Five” financial literacy questions are predictive of financial behaviors in a variety of domains: credit cards (e.g., incurring interest charges or making only minimum payments), investments (e.g., holding stocks, bonds, mutual funds or other securities), loans (e.g., making late payments on a mortgage, comparison shopping for a mortgage or auto loan), insurance coverage, and financial counseling (e.g., seeking professional advice for a mortgage, loan, insurance, tax planning or debt counseling). Similarly, Parker et al. (2012) find that both self-reported financial confidence and a test-based measure of financial literacy predict self-reported retirement planning and saving, and van Rooij et al. (2011) find that both self-perceived financial knowledge and a test-based measure of financial literacy predict stock market participation.

Although test-based and self-assessed measures of financial literacy are the norm in the literature, other approaches to measuring financial literacy may be worth considering. One alternative measurement strategy, limited by the requirement for robust administrative data, is to identify individuals exhibiting financially sophisticated behavior (e.g., capitalizing on matching contributions in an employer's savings plan, or consistently refinancing a mortgage when interest rates fall) and use these indicators to predict other outcomes. For example, Calvet et al. (2009) use administrative data from Sweden to construct an index of financial sophistication based on whether individuals succumb to three different types of financial “mistakes”: under-diversification, inertia in risk taking, and the disposition effect in stock holding.

An outcomes-based approach like this may be fruitful for predicting future behavior, more so than the traditionally used measures of financial literacy (although Calvet et al. 2009 do not perform such an exercise in their analysis). If we are interested in understanding the abilities that improve financial outcomes, we should define successful measures as those that, when changed, produce improved financial behavior. Such a strategy will likely generate greater internal validity for predicting consumer decisions in specific areas (e.g., portfolio choice or retirement savings), although it will significantly increase the requirements for research relative to strategies that rely on more general indicators of financial literacy (e.g., the “Big Three”).

4. WHAT IS THE RELATIONSHIP BETWEEN FINANCIAL EDUCATION, FINANCIAL LITERACY AND FINANCIAL OUTCOMES?

Consistent with the notion that financial literacy matters for financial optimization, a sizeable and growing literature has established a correlation between financial literacy and several different financial behaviors and outcomes. In one of the first studies in this vein, Hilgert et al. (2003) document a strong relationship between financial knowledge and the likelihood of engaging in a number of financial practices: paying bills on time, tracking expenses, budgeting, paying credit card bills in full each month, saving out of each paycheck, maintaining an emergency fund, diversifying investments, and setting financial goals. Subsequent research has found that financial literacy is positively correlated with planning for retirement, savings and wealth accumulation ( Ameriks et al. 2003 , Lusardi 2004 , Lusardi & Mitchell 2006 ; 2007 , Stango & Zinman 2008, Hung et al. 2009 , van Rooij et al. 2012 ). Financial literacy is predictive of investment behaviors including stock market participation ( van Rooij, et al. 2011 , Kimball & Shumway 2006 , Christelis et al. 2006), choosing a low fee investment portfolio ( Choi et al. 2011 , Hastings 2012), and better diversification and more frequent stock trading ( Graham et al. 2009 ). Finally, low financial literacy is associated with negative credit behaviors such as debt accumulation (Stango & Zinman 2008, Lusardi & Tufano 2009 ), high-cost borrowing ( Lusardi & Tufano 2009 ), poor mortgage choice ( Moore 2003 ), and mortgage delinquency and home foreclosure ( Gerardi et al. 2010 ).

Other related research documents a relationship between either numeracy or more general cognitive abilities and financial outcomes. Although these concepts are distinct from financial literacy, they tend to be positively correlated: individuals with higher general cognitive abilities or greater facility with numbers and numerical calculations tend to have higher levels of financial literacy ( Banks & Oldfield 2007 , Gerardi et al. 2010 ). Numeracy and more general cognitive ability predict stockholding ( Banks & Oldfield 2007 , Christelis et al. 2010 ), wealth accumulation ( Banks & Oldfield 2007 ), and portfolio allocation ( Grinblatt et al. 2009 ).

Although this evidence might lead one to conclude that financial education should be an effective mechanism to improve financial outcomes, the causality in these relationships is inherently difficult to pin down. Does financial literacy lead to better economic outcomes? Or does being engaged in certain types of economic behaviors lead to greater financial literacy? Or does some underlying third factor (e.g., numerical ability, general intelligence, interest in financial matters, patience) contribute to both higher levels of financial literacy and better financial outcomes? To give a more concrete example, individuals with higher levels of financial literacy might better recognize the financial benefits and be more inclined to enroll in a savings plan offered by their employer. On the other hand, if an employer automatically enrolls employees in the firm's saving plan, the employees may acquire some level of financial literacy simply by virtue of their savings plan participation. The finding noted earlier that most individuals cite personal experience as the most important source of their financial learning ( Hilgert et al. 2003 ) suggests that some element of reverse causality is likely. While this endogeneity does not rule out the possibility that financial literacy improves financial outcomes, it does make interpreting the magnitudes of the effects estimated in the literature difficult to interpret as they are almost surely upwardly biased in magnitude.

In addition, unobserved factors such as predisposition for patience or forward-looking behavior could contribute to both increased financial literacy and better financial outcomes. Meier & Sprenger (2010) find that those who voluntarily participate in financial education opportunities are more future-oriented. Hastings & Mitchell (2011) find that those who display patience in a field-experiment task are also more likely to invest in health and opt to save additional amounts for retirement in their mandatory pension accounts. Other unobserved factors like personality ( Borgans et al. 2008 ) or family background ( Cunha & Heckman 2007 , Cunha et al. 2010 ) could upwardly bias the observed relationship between financial education and financial behavior in non-experimental research.

Despite the challenges in pinning down causality, understanding causal mechanisms is necessary to make effective policy prescriptions. If the policy goal is increased financial literacy, then we need to know how individuals acquire financial literacy. How important is financial education? And how important is personal experience? And how do they interact? If, on the other hand, the goal is to improve financial outcomes for consumers, then we need to know if financial education improves financial outcomes (assuming it increases literacy) and we need to be able to weigh the cost effectiveness of financial education against other policy options that also impact financial outcomes.

What evidence is there that financial education actually increases financial literacy? The evidence is more limited and not as encouraging as one might expect. One empirical strategy has been to exploit cross sectional variation in the receipt of financial education. Studies using this approach have often found almost no relationship between financial education and individual performance on financial literacy tests. For example, Jumps$tart (2006) and Mandell (2008) document surprisingly little correlation between high school students’ financial knowledge levels and whether or not they have completed a financial education class. This empirical approach has obvious problems for making causal inferences: the students who take financial education courses in districts where such courses are voluntary are likely to be different from the students who choose not to take such courses, and the districts who make such courses mandatory for all students are likely to be different from the districts that have no such mandate. Nonetheless, the lack of any compelling evidence of a positive impact is surprising. Carpena et al. (2011) use a more convincing empirical methodology to get at the impact of financial education on financial literacy and financial outcomes. They evaluate a relatively large randomized financial education intervention in India and find that while financial education does not improve financial decisions that require numeracy, it does improve financial product awareness and individuals’ attitudes towards making financial decisions. There is definitely room in the literature for more research using credible empirical methodologies that examine whether, or in what contexts, financial education actually impacts financial literacy.

In the end, we are more interested in financial outcomes than financial knowledge per se. The literature on financial education and financial outcomes includes several studies with plausibly exogenous sources of variation in the receipt of financial education, ranging from small-scale field experiments to large-scale natural experiments. The evidence in these papers on whether financial education actually improves financial outcomes is best described as contradictory.

Several studies have looked toward natural experiments as a source of exogenous variation in who receives financial education. Skimmyhorn (2012) uses administrative data to evaluate the effects of a mandatory eight-hour financial literacy course rolled out by the U.S. military during 2007 and 2008 for all new Army enlisted personnel. Because the roll-out of the financial education program was staggered across different military bases, we can rule out time effects as a confounding factor in the results. He finds that soldiers who joined the Army just after the financial education course was implemented have participation rates in and average monthly contributions to the Federal Thrift Savings Plan (a 401(k)-like savings account) that are roughly double those of personnel who joined the Army just prior to the introduction of the financial education course. The effects are present throughout the savings distribution and persist for at least 2 years (the duration of the data). Using individually-matched credit data for a random subsample, he finds limited evidence of more widespread improved financial outcomes as measured by credit card balances, auto loan balances, unpaid debts, and adverse legal actions (foreclosures, liens, judgments and repossessions).

Bernheim et al. (2001) and Cole & Shastry (2012) examine another natural experiment which created variation in financial education exposure: the expansion over time and across states in high school financial education mandates. The first of these studies concludes that financial education mandates do have an impact on at least one measure of financial behavior: wealth accumulation. But Cole & Shastry (2012) , using a different data source and a more flexible empirical specification, 6 examine the same natural experiment and conclude that there is no effect of the state high school financial education mandates on wealth accumulation, but rather, that the state adoption of these mandates was correlated with economic growth which could have had an independent effect on savings and wealth accumulation.

In addition to examining natural experiments, researchers have also randomly assigned financial aid provision to evaluate the impact of financial education on financial outcomes. For example, Drexler et al. (2012) examine the impact of two different financial education programs targeted at micro-entrepreneurs in the Dominican Republic as part of a randomized controlled trial on the effects of financial education. Their sample of micro-entrepreneurs was randomized to be in either a control group or one of two treatment groups. Members of one treatment group participated in several sessions of more traditional, principles-based financial education; members of the other treatment group participated in several sessions of financial education oriented around simple financial management rules of thumb. The authors examine participants’ use of several different financial management practices approximately one year after the financial education courses were completed. Relative to the control group, the authors find no difference in the financial behaviors of the treatment group who received the principles-based financial education; they do find statistically significant and economically meaningful improvements in the financial behavior of the treatment group who participated in the rule-of-thumb oriented financial education course. The results of this study suggest that how financial education is structured could matter in whether it has meaningful effects at the end of the day, and might help explain why many other studies have found much weaker links between financial education and economic outcomes.

Gartner & Todd (2005) evaluate a randomized credit education plan for first-year college students but find no statistically significant differences between the control and treatment groups in their credit balances or timeliness of payments. Servon & Kaestner (2008) used random variation in a financial literacy training and technology assistance program find virtually no differences between the control and treatment groups in a variety of financial behaviors (having investments, having a credit card, banking online, saving money, financial planning, timely bill payment and others), though they suspect that the program was implemented imperfectly. In a small randomized field experiment, Collins (2010) evaluates a financial education program for low and moderate income families and finds improvements in self-reported knowledge and behaviors (increased savings and small improvements in credit scores twelve months later), but the sample studied suffers from non-random attrition. Finally, Choi et al. (2011) randomly assign some participants in a survey to an educational intervention designed to teach them about the value of the employer match in an employer sponsored savings plan. Using administrative data, they find statistically insignificant differences in future savings plan contributions between the treatment and the control group, even in the face of significant financial incentives for savings plan participation.

Additional non-experimental research using self-reported outcomes and potentially endogenous selection into financial education suggests a positive relationship between financial education and financial behavior. This positive relationship has been documented for credit counseling ( Staten 2006 ), retirement seminars ( Lusardi 2004 , Bernheim & Garrett 2003 ), optional high school programs ( Boyce & Danes 2004 ), more general financial literacy education ( Lusardi & Mitchell 2007 ), and in the military ( Bell et al. 2008 ; 2009 ).

Altogether, there remains substantial disagreement over the efficacy of financial education. While the most recent reviews and meta-analyses of the non-experimental evidence ( Collins et al. 2009 , Gale & Levine 2011 ) suggest that financial literacy can improve financial behavior, these reviews do not appear to fully discount non-experimental research and its limitations for causal inference. Of the few studies that exploit randomization or natural experiments, there is at best mixed evidence that financial education improves financial outcomes. The current literature is inadequate to draw conclusions about if and under what conditions financial education works. While there do not appear to be any negative effects of financial education other than increased expenditures, there are also almost no studies detailing the costs of financial education programs on small or large scales ( Coussens 2006 ), and few that causally identify their benefits towards improved financial outcomes.

To inform policy discussion, this literature needs additional large-scale randomized interventions designed to effectively identify causal effects. Randomized interventions coupled with measures of financial literacy could address the question of how best to measure financial literacy while also providing credible assessments of the effect of financial education on financial literacy and economic outcomes. A starting point could be incorporating experimental components into existing large scale surveys like the NFCS; for example, a subset of respondents could be randomized to participate in an on-line financial education course or to receive a take-home reference guide to making better financial decisions. Measuring financial literacy before and immediately after the short course would test if financial education improves various measures of financial literacy in the short-run. A subsequent follow-up survey linked to administrative data on financial outcomes (e.g., credit scores) would measure if short-run improvements in financial literacy last, and which measures of financial literacy, if any, are correlated with improved financial outcomes. Studies along these lines are needed to identify the causal effects of financial education on financial literacy and financial outcomes, identify the best measures of financial literacy, and inform policy makers about the costs and benefits of financial education as a means to improve financial outcomes.

5. WHAT IS THE ROLE OF PUBLIC POLICY IN IMPROVING INDIVIDUAL FINANCIAL OUTCOMES?

Given the current inconclusive evidence on the causal effects of financial education on either financial literacy or financial outcomes, there remains disagreement over whether financial education is the most appropriate policy tool for improving consumer financial outcomes. As expected, those who believe that financial education works favor more financial education ( Lusardi & Mitchell 2007 , Hogarth 2006 , Martin 2007 ). Others, optimistic about the promise of financial education despite what they view as weak empirical evidence of positive effects, support more targeted and timely education with greater emphasis on experimental design and evaluation ( Hathaway & Khatiwada 2008 , Collins & O'Rourke 2010 ). Finally, some who do not believe the research demonstrates positive effects support other policy options ( Willis 2008 ; 2009 ; 2011 ). In this section, we place financial education in the context of the broader research on alternative ways to improve financial outcomes.

5.1 Is There a Market Failure?

As economists, we start this section with the question of market failure: Is there a need for public policy in improving financial knowledge and financial outcomes, or can the market work efficiently without government intervention? If, like other forms of human capital, financial knowledge is costly to accumulate, there may be an optimal level of financial literacy acquisition that varies across individuals based on the expected need for financial expertise and individual preference parameters (e.g., discount rates). Jappelli & Padula (2011) and Lusardi et al. (2012) both use the relationship between financial literacy and wealth as their point of departure in modeling the endogenous accumulation of financial literacy. In both papers, investments in financial literacy have both costs (time and monetary resources) and benefits (access to better investment opportunities) which may be correlated with household education or initial endowments. In the model of Jappelli & Padula (2011) , the optimal stock of financial literacy increases with income, the discount factor (patience), the return to financial literacy, and the initial stock of financial literacy. 7 In the model of Lusardi et al. (2012) , more educated households have higher earnings trajectories than those with less education and also have stronger savings motives due to the progressivity built into the social safety net. Because they save more, they value better financial management technologies more than those with lower incomes, and they rationally acquire a higher level of financial literacy.

These models suggest that differences in financial literacy acquisition may be individually rational. Consistent with this supposition, Hsu (2011) uses data from the Cognitive Economics Survey which includes measures of financial literacy for a set of husbands and their wives to examine the determination of financial literacy in married couples. She finds that wives have a lower average level of financial literacy than their husbands (cf. the gender differences in Table 3 ), which she posits arise from a rational division of household labor with men being more likely to manage household finances. Women, however, have longer life expectancies than their husbands and many will eventually need to assume financial management responsibilities. She finds that women actually acquire increased financial literacy as they approach widowhood, with the majority catching up to their husbands prior to being widowed.

More generally, limited financial knowledge may be a rational outcome if other entities—a spouse, an employer, a financial advisor—can help individuals compensate for their deficiencies by providing information, advice, or financial management. We don't expect individuals to be experts in all other domains of life—that is the essence of comparative advantage. Specialization in financial expertise may be efficient if it allows computational and educational investment to be concentrated or aggregated in specialized individuals or entities that develop algorithms and methods to guide consumers through financial waters.

Although low levels of financial literacy acquisition may be individually rational in some models, limited financial knowledge may create externalities such as reduced competitive pressure in markets which leads to higher equilibrium prices ( Hastings et al. 2012 ), higher social safety net usage, lower quality of civic participation, and negative impacts on neighborhoods ( Campbell et al. 2011 ), children ( Figlio et al. 2011 ) and families. Such externalities may imply a role for government in facilitating improved financial decision making through financial education or other mechanisms.

Individuals may also be subject to biases such as present-bias that lead to lower investments in financial knowledge today but which imply ex post regret in the future (sometimes referred to as an “internality”). Barr et al. (2009) note that in some contexts, firms have incentives to help consumers overcome their fallibilities. For example, if present bias leads consumers to save too little, financial institutions whose profits are tied to assets under management have incentives reduce consumer bias and encourage individuals to save more. In other contexts, however, firms may have incentives to exploit cognitive biases and limited financial literacy. For example, if consumers misunderstand how interest compounds and as a consequence borrow too much ( Stango & Zinman 2009 ), financial institutions whose profits are tied to borrowing have little incentive to educate consumers in a way that would correct their misperceptions.

What evidence is there on whether markets help individuals compensate for their limited financial capabilities? Unfortunately, many firms exploit rather than offset consumer shortcomings. Ellison (2005) and Gabaix & Laibson (2006) develop models of add-on and hidden pricing to explain the ubiquitous pricing contracts observed in the banking, hotel, and retail internet sales industries. Both models have naïve and informed customers and show that for reasonable parameter values, firms do not have an incentive to debias naïve consumers even in a competitive market. This leads to equilibrium contracts with low advertised prices on a “salient” price and high hidden fees and add-ons which naïve customers pay and sophisticated customers take action to avoid.

Opaque and complicated fees are widespread, and several empirical papers link these fee structures to shortcomings in consumer optimization. Ausubel (1999) analyzes a large field experiment in which a credit card company randomized mail solicitations varying the interest rate and duration of the credit card's introductory offer. He finds that individuals are overly responsive to the terms of the introductory offer and appear to underestimate their likelihood of holding balances past the introductory offer period with a low interest rate. 8 In a similar vein, Ponce (2008) evaluates a field experiment in Mexico in which a bank randomized the introductory teaser rate offered to prospective customers. He finds that a lower teaser rates leads to substantially higher levels of debt, even several months after the teaser rate expires, and that the higher debt results from lower payments rather than higher purchases or cash advances. Evaluating non-randomized offers to potential customers, he shows that banks do not randomly assign teaser rates but dynamically price discriminate by targeting offers to consumers who are more likely to permanently increase their balances.

Given that many firms are trying to actively obfuscate prices, it should not be surprising that there is little evidence that firms act to debias consumers through informative advertising or investments in financial education. In models of add-on prices, firms can hide prices or make them salient. Similarly, firms can invest in advertising that lowers price sensitivity, focusing consumer choice on non-price attributes, or in advertising that increases price competition by alerting customers to lower prices. In models of informative advertising, firms reduce information costs and expand the market by informing consumers of their price and location in product space. In contrast, in models of persuasive advertising, firms emphasize certain product characteristics and deemphasize others to change consumer's expressed preferences. For example a financial firm could advertise returns for the last year rather than management fees to convince investors that they should primarily evaluate past returns when choosing a fund manager. A financially literate consumer may be unmoved by this advertising strategy, but those who are less literate might be persuaded and end up paying higher management fees.

Hastings et al. (2012) use administrative data on advertising and fund manager choices for account holders in Mexico's privatized pension system. When the privatized system started, the government presumed that firms would compete on price (management fees) and engage in informative advertising to explain fees to consumers and win their accounts. Instead, firms invested heavily in sales force and marketing, and the authors find that heavier exposure to sales force (appropriately instrumented) resulted in lower price sensitivity and higher brand loyalty. This in turn lowered demand elasticity (recall equation 2) and increased management fees in equilibrium.

Importantly, informative advertising itself may be a public good. For example, advertising that explains the value of savings to individuals can benefit both the firm that makes the investment and its competitors if it increases demand for savings products in general. On the other hand, persuasive advertising attempts to convince customers that one product is better than another so that the benefits accrue to the firm that is advertising. The market may underprovide informative advertising in equilibrium because of the inherent free rider problem. Hastings et al. (in progress) test this theory using a marketing field experiment with two large banks in the Philippines. They find evidence that if firms face advertising constraints, persuasive rather than informative advertising maximizes profits. This suggests a role for government to remedy underprovision of public goods. In particular, these results suggest that financial products firms would welcome a tax that would fund public financial education as it would expand the market (e.g., increase total savings) and commit each institution to contribute to the public good. Note in equilibrium this could change firms’ incentives for add-on pricing as well by lowering the fraction of naïve customers in financial products markets ( Gabaix & Laibson 2006 ).

Even if firms do not have incentives to facilitate efficient consumer outcomes, a competitive market may generate an intermediate sector providing advice and guidance. This sector could provide unbiased decision-making-assistance that would lower decision making costs and efficiently expand the market. However, classic principal-agent problems may make such an efficient intermediate market difficult to attain.

Two recent studies highlight the limits of the financial advice industry as incentive-compatible providers of guidance and counsel on financial products and financial decision making. Mullainathan et al. (2012) conduct an audit study of financial advisors in Boston, sending to them scripted investors who present needs that are either in line with or at odds with the financial advisor's personal interests (e.g., passively managed vs. actively managed funds). They find that many advisors act in their personal interests regardless of the client's actual needs and that they reinforce client biases (e.g., about the merits of employer stock) when it benefits them to do so. Similarly, Anagol et al. (2012) conduct an audit study of life insurance agents in India who are largely commission motivated. As in the previous study, scripted customers present themselves to the agents with differing amounts of financial and product knowledge. They find that life insurance agents recommend products with higher commissions even if the product is suboptimal for the customer. They also find that agents are likely to cater to customer's beliefs, even if those beliefs are incorrect. Finally, instead of debiasing less literate consumers, agents are less likely to give correct advice if the customer presents with a low degree of financial sophistication. Together these studies suggest that with asymmetric information, there is both a principal agent problem and an incentive for advisors to compete by reinforcing biases rather than providing truthful recommendations ( Gentzkow & Shapiro 2006 ; 2010 , Che et al. 2011 ).

Overall, this section suggests that are several potential roles for government in improving financial outcomes for consumers. First, government can help solve the public goods problems which result in underinvestment in financial education. Second, government can regulate the disclosure of fees and pricing. And third, government can provide unbiased information and advice.

5.2 The Scope for Government Intervention

If there is a role for government intervention, what form should it take? We have already summarized the literature on financial education. Briefly, there is at best conflicting evidence that financial education leads to improved economic outcomes either through increasing financial literacy directly or otherwise. So while the logical public policy response to many observers is to increase public support for financial education, this option may not be an efficient use of public resources even if it will likely do no harm. 9 In some contexts, other policy responses such as regulation may be more cost effective.

One regulatory alternative is to design policies that address biases and reduce the decision making costs that consumers face in financial product markets ( Thaler & Sunstein 2008 ). Because the financial literacy literature currently offers only limited models of behavior that give rise to the observed differences in financial literacy and economic outcomes, it is difficult to turn to this literature to design policies that address the underlying behaviors that lead to low levels of financial literacy and poor financial decision making. However, the literatures in behavioral economics and decision theory have developed several models that are relevant, and policies from this literature that address behavioral biases like present bias and choice overload may provide templates for effective and efficient remedies.

Several papers in this vein have already had substantial policy influence. For example, Madrian & Shea (2001) and Beshears et al. (2008) examine the impact of default rules on retirement savings outcomes. They find that participation in employer-sponsored savings plans is substantially higher when the default outcome is savings plan participation (automatic enrollment) relative to when the default is non-participation. Beshears et al. ascribe this finding to three factors. First, automatic enrollment simplifies the decision about whether or not to participate in the savings plan by divorcing the participation decision from related choices about contribution rates and asset allocation. Second, automatic enrollment directly addresses problems of present bias which may result in well-intentioned savers procrastinating their savings plan enrollment indefinitely. Finally, the automatic enrollment default may service as an endorsement (implicit advice) that individuals should be saving. In related research, Thaler & Benartzi (2004) find that automatic contribution escalation leads to substantially higher savings plan contribution rates over a period of four years. These results collectively motivated the adoption of provisions in the Pension Protection Act of 2006 that encourage U.S. employers to adopt automatic enrollment and automatic contribution escalation in their savings plan.

Hastings and co-authors ( Duarte & Hastings 2011 , Hastings et al. 2012 , Hastings, in progress) examine Mexico's experience in privatizing their social security system and draw lessons for policy design. Hastings et al. (2012) find that without regulation, advertising reduces investor sensitivity to financial management fees and increases investor focus on non-price attributes such as brand name and past returns. In simulations, they find that neutralizing the impact of advertising on preferences results in price-elastic demand. These results suggest that centralized information provision and regulation of both disclosure and advertising are important to ensure that individuals with limited financial capabilities have access to the information necessary for effective decision making and to minimize their confusion or persuasion by questionable advertising tactics.

In a related paper, Duarte & Hastings (2011) examine the impact of an information disclosure policy mandated in Mexico. In 2005 the government attempted to increase fee transparency in the privatized social security system by introducing a single fee index which collapsed multiple fees (loads and fees on assets under management) into one measure. Prior to the policy, investor behavior was inelastic to either type of fee or, indeed, any measure of management costs. In contrast, after the policy, demand was very responsive to the fee index. Once investors had a simple way to assess ‘price’, they shifted their investments to the funds with a low index value. This example suggests that investors can be greatly helped by policies that simplify fee structures and either advertise fees or require that they are disclosed in an easy-to-understand way. This example also highlights the potential pitfalls of ill-conceived regulations. Although the policy shifted demand, it had little impact on overall management costs. This is because the index combined fees according to a formula and firms could game the index by lowering one fee while raising another. Not surprisingly, firms optimized accordingly (another example of obfuscated pricing as discussed earlier). The government eventually responded by restricting asset managers to charging only one kind of fee, obviating the need for a fee index.

Hastings (in progress) evaluates two field experiments as part of a household survey (the 2010 EERA referenced in Table 2 ) to further understand the impact of information and incentives on management fund choice by affiliates of Mexico's privatized social security system. Households in the survey were randomly assigned to receive simplified information on fund manager net returns (the official information required by the social security system at the time) presented as either a personalized projected account balance or as an annual percentage rate. In addition to that treatment, households were randomly assigned to receive a small immediate cash incentive for transferring assets to any fund manager that had a better net return (or a higher projected personal balance). While those with lower financial literacy scores are better able to rank the fund managers correctly when presented with information on balance projections instead of APRs (replicating prior results in Hastings & Tejeda-Ashton 2008 , Hastings & Mitchell 2011 ), she finds no impact of this information on subsequent decisions to change fund managers. Rather, individuals who receive the small cash incentive are more likely to change fund managers (for the better) regardless of the type of information received. These preliminary results suggest that incentives that both address procrastination and that are tied to better behavior may be more effective than financial education as financial education does not carry with it any incentive to act. We note that these results are still short-run and preliminary as they are based on a follow-up survey. Final results will depend on administrative records for switching which are not subject to problems inherent in self-reports. 10

Campbell et al. (2011) lay out a useful framework for thinking about potential policy options to improve financial outcomes for consumers. They suggest that evaluating consumers along two dimensions, their preference heterogeneity and their level of financial sophistication (or, in the parlance of this paper, their financial literacy), may help narrow the set of appropriate policy levers for improving consumer financial outcomes. At one extreme, take the case of stored value cards, a product used by a large number of unsophisticated consumers and for which consumer preferences are relatively homogeneous. Campbell et al. propose that in this case, since everyone largely wants the same thing, consumers are probably best served through the application of strict rules. This is likely to be more efficient and cost effective than attempting to educate consumers in an environment in which firms are less stringently regulated. In contrast, if consumers are financially knowledgeable and have heterogeneous preferences other approaches may make more sense. Although Campbell et al. do not discuss financial education in this context, it would seem that financial education, to the extent that it impacts financial literacy and economic outcomes, is a tool that holds most promise in markets for products with some degree of preference heterogeneity and that require some degree of financial knowledge. At the other extreme, there are products like hedge funds that cater to individuals with tremendous preference heterogeneity and that require a sizeable amount of financial knowledge for effective use. The latter condition may seem like a perfect reason to justify financial education. We would counter, however, that in such a context it may be difficult for public policy to effectively intervene in providing the level of financial education that would be required. For products for which extensive expertise is required, it may be more efficient to restrict markets to those who can demonstrate the skills requisite for appropriate and effective use.

Overall, the literature suggests that there are many alternatives to financial education that can be used to improve financial outcomes for consumers: strict regulation, providing incentives for improved choice architecture, simplifying disclosure about product fees, terms, or characteristics, and providing incentives to take action. Although none of the studies that we reviewed here ran a horse race between these other approaches and financial education, many of them show larger effects than can be ascribed to financial education in the existing literature. Expanding these studies to other relevant markets such as credit card regulation, payday loan regulation, mortgages, and car or appliance loans present important next steps in understanding how best to improve consumer financial outcomes.

6. DIRECTIONS FOR FUTURE RESEARCH

In this paper, we have evaluated the literature on financial literacy, financial education, and consumer financial outcomes. This literature consistently finds that many individuals perform poorly on test-based measures of financial literacy. These findings, coupled with a growing literature on consumers’ financial mistakes and documenting a positive correlation between financial literacy and suboptimal financial outcomes, have driven policy interest in efforts to increase financial literacy through financial education. However, there is little consensus in the literature on the efficacy of financial education. The existing research is inadequate for drawing conclusions about if and under what conditions financial education works.

The directions for future research depend in part on the goal at hand. If the goal is to improve financial literacy, the directions for future research that follow hinge on financial literacy and the role of financial education in enhancing financial literacy.

One set of fundamental issues relate to capabilities. What are the basic financial competencies that individuals need? What financial decisions should we expect individuals to successfully make independently, and what decisions are best relegated to an expert? To draw an analogy, we don't expect individuals to be experts in all domains of life—that is the essence of comparative advantage. Most of us consult doctors when we are ill and mechanics when our cars are broken, but we are mostly able to care for a common cold and fill the car with gas and check our tire pressure independently. What level of financial literacy is necessary or desirable? And should certain financial transactions be predicated on demonstrating an adequate level of financial literacy, much like taking a driver's education course or passing a driver's education test is a prerequisite for getting a driver's license. If so, for what types of financial decisions would such a licensing approach make most sense?

Another set of open questions relate to measurement. How do we best measure financial literacy? Which measurement approaches work best at predicting financial outcomes? And what are the tradeoffs implicit in using different measures of financial literacy (e.g., how does the marginal cost compare to the marginal benefit of having a more effective measure?).

A third set of issues surrounds how individuals acquire financial literacy and the mechanisms that link financial literacy to financial outcomes. How important are skills like numeracy or general cognitive ability in determining financial literacy, and can those skills be taught? To the extent that financial literacy is acquired through experience, how do we limit the potential harm that consumers suffer in the process of learning by doing? Is financial education a substitute or a complement for personal experience?

We need much more causal research on financial education, particularly randomized controlled trials. Does financial education work, and if so, what types of financial education are most cost effective? Much of the literature on financial education focuses on traditional, classroom based courses. Is this the best way to deliver financial education? More generally, how does this approach compare with other alternatives? Is a course of a few hours length enough, or should we think more expansively about integrated approaches to financial education over the lifecycle? Or, on the other extreme, should financial education be episodic and narrowly focused to coincide with specific financial tasks? There are many other ways to deliver educational content that could improve financial decision making: internet-based instruction, podcasts, web sites, games, apps, printed material. How effective (and how cost effective) are these different delivery mechanisms, and are some better-suited to some groups of individuals or types of problems than others? Should the content of financial education initiatives be focused on teaching financial principles, or rules of thumb? In the randomized controlled trial of two different approaches to financial education for microenterprise owners in the Dominican Republic discussed earlier, Drexler et al. (2011) find that rule-of-thumb based financial education is more effective at improving financial practices than principles-based education. How robust is this finding? And to what extent can firms nullify rules-of-thumb through endogenous responses to consumer behavior (see Duarte & Hastings 2011 )?

Even if we can develop effective mechanisms to deliver financial education, how do we induce the people who most need financial education to get it? School-based financial education programs have the advantage that, while in school, students are a captive audience. But schools can only teach so much. Many of the financial decisions that individuals will face in their adult lives have little relevance to a 17-year-old high school student: purchasing life insurance, picking a fixed vs. an adjustable rate mortgage, choosing an asset allocation in a retirement savings account, whether to file for bankruptcy. How do we deliver financial education to adults before they make financial mistakes, or in ways that limit their financial mistakes, when we don't have a captive audience and financial education is only one of many things competing for time and attention?

Finally, what is the appropriate role of government in either directly providing or funding the private provision of financial education? If financial education is a public good (Hastings et al., in progress), would industry support a tax to finance publically-provided financial education? If so, what form would that take?

If instead of improving financial literacy our goal is to improve financial outcomes, then the directions for future research are slightly different. The overarching questions in this case center around the tools that are available to improve financial outcomes. This might include financial education, but it might also include better financial market regulation, different approaches to changing the institutional framework for individual and household financial decision making, or incentives for innovation to create products that improve financial outcomes.

With this broader frame, one important question on which we have little evidence is which tools are most cost effective at improving financial outcomes? For some outcomes, the most cost effective tool might be financial education, but for other outcomes, different approaches might work better. For example, financial education programs have had only modest success at increasing participation in and contributions to employer-sponsored savings plans; in contrast, automatic enrollment and automatic contribution escalation lead to dramatic increases in savings plan participation and contributions ( Madrian & Shea 2001 , Beshears et al. 2008 , Thaler & Benartzi 2004 ). Moreover, automatic enrollment and contribution escalation are less expensive to implement than financial education programs. What approaches to changing financial behavior generate the biggest bang for the buck, and how does financial education compare to other levers that can be used to change outcomes?

Despite the contradictory evidence on the effectiveness of financial education, financial literacy is in short supply and increasing the financial capabilities of the population is a desirable and socially beneficial goal. We believe that well designed and well executed financial education initiatives can have an effect. But to design cost effective financial education programs, we need better research on what does and does not work. We also should not lose sight of the larger goal—financial education is a tool, one of many, for improving financial outcomes. Financial education programs that don't improve financial outcomes can hardly be considered a success.

Unfortunately, we have little concrete evidence to provide answers. We have a pressing need for more and better research to inform the design of financial education interventions and to prioritize where financial education resources can be best spent. To achieve this, funding for financial education needs to be coupled with funding for evaluation, and the design and implementation of financial education interventions needs to be done in a way that facilitates rigorous evaluation.

Acknowledgments

We acknowledge financial support from the National Institute on Aging (grants R01-AG-032411-01, A2R01-AG-021650 and P01-AG-005842). We thank Daisy Sun for outstanding research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Institute on Aging, the National Bureau of Economic Research, or the authors’ home universities. For William Skimmyhorn, the views expressed herein are those of the author and do not reflect the position of the United States Military Academy, the Department of the Army, the Department of Defense, or the National Bureau of Economic Research. See the authors’ websites for lists of their outside activities. When citing this paper, please use the following: Hastings JS, Madrian BC, SkimmyhornWL. 2012. Financial Literacy, Financial Education and Economic Outcomes. Annual Review of Economics 5: Submitted. Doi: 10.1146/annurev-economics-082312-125807.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Financial Literacy, Financial Education and Economic Outcomes Justine S. Hastings, Brigitte C. Madrian, and William L. Skimmyhorn NBER Working Paper No. 18412 September 2012 JEL No. C93,D14,D18,D91,G11,G28

1 See Dodd-Frank Wall Street Reform and Consumer Protection Act. H.R. 4173. Title X - Bureau of Consumer Financial Protection 2010, Section 1013. < http://www.gpo.gov/fdsys/pkg/BILLS-111hr4173enr/pdf/BILLS-111hr4173enr.pdf , accessed September 13, 2012>

2 By 2011, economic education had been incorporated into the K-12 educational standards of every state except Rhode Island, and personal finance was a component of the K-12 educational standards in all states except Alaska, California, New Mexico, Rhode Island, and the District of Columbia (Council for Economic Education, 2011).

3 See http://www.ja.org/about/about_history.shtml and http://www.councilforeconed.org/about/ .

4 The NFCS has three components, a national random-digit-dialed telephone survey, a state-by-state on-line survey, and a survey of U.S. military personnel and their spouses.

5 Based on author's calculations using TNE survey responses from 2012 linked to college loan taking data in Chile. See Hastings, Neilson and Zimmerman (in progress) for details on the survey and data.

6 Cole and Shastry (2010) are able to replicate the qualitative results of Bernheim, Garrett and Maki (2001) when using the same empirical specification even though they use a different source of data.

7 Financial literacy and savings are positively correlated in this model, although the relationship is not causal as both are endogenously determined.

8 See the Frontline documentary ”The Card Game” about how teaser rate policies were developed in response to customer service calls in which consumers were persistently overconfident in their ability to repay their debt.

9 See the discussion in Section 4. There is also a large literature in the economics of education documenting the fact that large increases in real spending per pupil in the United States has led to no measurable increase in knowledge as measured by ability to answer questions on standardized tests.

10 If the preliminary results hold, this policy is a very inexpensive alternative to financial education. Hastings notes that the immediate return (net of the incentive) on each incentivized offer from resorting of individuals across fund managers, before allowing firms to drop prices in response, results in $30 USD in expectation. Aggregated over 30 million account holders, this is a large savings even before allowing for secondary competitive effects, and in equilibrium it is virtually costless to implement.

RELATED RESOURCES

The following datasets with financial literacy questions that are referenced in this article are currently publically available.

2004 U.S. Health and Retirement Survey: http://hrsonline.isr.umich.edu/index.php?p=data

2010 U.S. Health and Retirement Survey: http://hrsonline.isr.umich.edu/index.php?p=data

2009 Rand American Life Panel Wellbeing 64: https://mmicdata.rand.org/alp/index.php?page=data&p=showsurvey&syid=64

2009 U.S. National Financial Capability Study: http://www.finrafoundation.org/programs/p123306

2009 Chilean Social Protection Survey (EPS): http://www.proteccionsocial.cl/index.asp

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It’s Time to Prioritize Employees’ Financial Health

  • Manisha Thakor

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Eighty percent of employees report being financially stressed. Only 28% of employers offer financial wellness programs.

When an individual has financial health, they experience greater overall well-being and bring their best selves to the workplace. Unfortunately, 80% of employees report being financially stressed, and only 28% of employers offer financial wellness programs. Today’s workers must navigate complicated benefits packages and make critical decisions about their personal finances with limited or no guidance from their employers. This article discusses three steps you as an employer can take to boost the financial health of your employees and alleviate money-related stress and distractions: 1) take an “ecosystem” approach to employees’ financial health, 2) help employees effectively navigate benefits, and 3) recruit an external firm or in-house expert to provide education on financial well-being.

You may not realize it, but many of your employees are in financial distress. And they need your help.

  • Manisha Thakor has worked in financial services for more than 30 years, with an emphasis on women’s economic empowerment. Her latest book, MoneyZen : The Secret to Finding Your “Enough” , focuses on helping individuals of all ages to balance financial health and emotional wealth. Thakor earned her MBA from Harvard Business School and her BA from Wellesley College. Her website is MoneyZen.com.

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What to know about changes to this year’s FAFSA application for college students

File - Students make their way through the Sather Gate near Sproul Plaza on the University of California, Berkeley, campus March 29, 2022, in Berkeley, Calif. The Free Application for Federal Student Aid is available for the 2024-2025 school year, three months later than usual. (AP Photo/Eric Risberg, File)

File - Students make their way through the Sather Gate near Sproul Plaza on the University of California, Berkeley, campus March 29, 2022, in Berkeley, Calif. The Free Application for Federal Student Aid is available for the 2024-2025 school year, three months later than usual. (AP Photo/Eric Risberg, File)

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NEW YORK (AP) — A new version of the federal student aid application known as the FAFSA is available for the 2024-2025 school year, but only on a limited basis as the U.S. Department of Education works on a redesign meant to make it easier to apply.

That means the Free Application for Federal Student Aid students can usually fill out starting in October isn’t yet available to everyone.

A soft launch period opened last week and the Department of Education said it will continue to make the new form available for short periods of time. Students who want to submit their applications now will need to monitor the studentaid.gov website since it’s available at different times during the day.

Since the soft launch was announced, there has been limited availability and some students and their families have experienced glitches.

A passer-by walks through a gate to the Harvard University campus, Tuesday, Jan. 2, 2024, in Cambridge, Mass. Harvard University President Claudine Gay resigned Tuesday amid plagiarism accusations and criticism over testimony at a congressional hearing where she was unable to say unequivocally that calls on campus for the genocide of Jews would violate the school's conduct policy. (AP Photo/Steven Senne)

“Even by soft launch standards, this weekend’s rollout was challenging and students, families, and financial aid administrators who have been waiting for this release for months are understandably frustrated,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators.

A spokesperson for the Department of Education said the department hopes to keep the application open for longer stretches as it resolves issues with the new form.

The relaunch brings major changes such as fewer questions, the ability to list more colleges and availability in more languages. However, the update means students will get their financial aid offers later than usual.

Here’s what you need to know:

HOW DOES THE FAFSA WORK?

The FAFSA is a free government application that uses financial information from you and your family to determine whether you can get financial aid from the federal government to pay for college.

The FAFSA will send your financial information to the schools you say you are interested in attending. It previously only allowed you to send your information to 10 schools, but the new application will allow you to send your application to up to 20. Each school that admits you will send you a financial aid package. The amount of financial aid you get depends on each institution.

The application is also used to determine eligibility for other federal student aid programs, like work-study and loans, as well as state and school aid. Sometimes, private, merit-based scholarships also require FAFSA information to determine if you qualify.

WHEN WILL THE 2024-2025 FAFSA BE AVAILABLE?

The Education Department announced a soft launch period in late December.

“During the soft launch, the FAFSA form will be available to students and families periodically while we monitor site performance and form functionality,” according to the department website.

The department hasn’t said when the soft launch period will end and the application will be fully released.

WHO SHOULD FILL OUT THE FAFSA?

Anyone planning to attend college next year. Both first-time college students and returning students can apply for the FAFSA. Many decide not to apply thinking their family’s income is too high to be considered, but all students are advised to fill out the application.

Students and parents can use the federal student aid estimator to get an early approximation of their financial package.

WHAT ARE THE KEY CHANGES FOR THE NEW FAFSA?

In general, the relaunch of the application is meant to make the process smoother for students and their families. The Education Department also said the relaunch will increase eligibility for financial aid for low- and middle-income students.

“Most students and families will be able to complete the process in less time and we’ll see more students qualify for need-based aid,” Draeger said.

Here are the key changes:

Starting this year, everyone who needs to provide information for the FAFSA must create an FSA ID.

In previous years, only the student and one parent needed to have an FSA ID. For the 2024-2025 form, anyone who needs to provide information , such as the student’s spouse, biological or adoptive parent, or the parent’s spouse, must have an individual FSA ID.

To create an FSA ID, contributors need their Social Security number and email address.

— Student Aid Index

The new FAFSA will replace the Expected Family Contribution with a different formula called the Student Aid Index that will help determine the amount that each student can receive in financial aid.

Both formulas consider the income and assets of the student and their parents and include both taxed and untaxed income. But unlike the old formula, the new one won’t benefit families with multiple students in college. The new formula will allow students from families that are not required to file federal income taxes to automatically be considered for a high financial aid amount.

— IRS Data Retrieval Tool

The updated FAFSA will include fewer questions, which will make the application quicker to fill out. However, all contributors must give their consent for their IRS information to be directly imported into the FAFSA.

In previous years, it was optional to use the IRS Data Retrieval Tool . Now, if a contributor doesn’t consent to having their information imported, the student will not be eligible for financial aid.

— More languages available

The FAFSA will be available in the 11 most common languages. Previously it was only available in English and Spanish.

— More eligibility for Federal Pell Grants

In the 2024-2025 award year , more students will be eligible to receive a federal Pell Grant . According to the Education Department, an estimated 610,000 new students will be eligible for a grant. It will also allow 1.5 million more students to receive the maximum Pell Grant award, which will bring the number of students who are eligible for the maximum award to over 5.2 million. The maximum federal Pell Grant award available last year was $7,395.

WHAT CAN I DO WHILE I WAIT TO FILL OUT MY APPLICATION?

While you wait to fill out the FAFSA, make sure that you create an FSA ID for yourself and all contributors.

When you create your FSA ID, it will take one to three days for your information to be confirmed. So, it’s important that every contributor creates their FSA ID before the student starts filling out the application.

WHEN CAN I EXPECT TO KNOW MY FINANCIAL AID AWARD?

Since the process has been delayed this year, students will begin to receive their offers later than usual. If a student fills out the application as soon as it’s available, their listed colleges won’t receive their information until potentially the end of January, Draeger said.

“There will be a bit of a gap and potentially delay so we ask for a little bit of patience,” Draeger said.

Draeger recommends that students regularly check their desire college’s website for new relevant deadlines.

The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.

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https://www.wsj.com/articles/fafsa-redesign-congress-financial-aid-education-department-41507866

Congress’s College Financial Aid Fiasco

The revised student aid form means middle-class parents will pay more..

Dec. 21, 2023 6:33 pm ET

image

Next to paying tuition bills, parents of college-age students dread few things more than completing the Free Application for Federal Student Aid, aka FAFSA. So it would seem to be good news that the Education Department this month is rolling out a new and supposedly simpler form. But government makes nothing free or simple.

Members of Congress from both parties have long complained that the FAFSA is unduly complicated and makes college less accessible. The feds use the form to determine student eligibility for Pell grants and federal loans. Many colleges use it to determine how much institutional aid to award students.

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New York City

San francisco, a range of major financial hubs, what characteristics make a city a financial hub, how many people in new york work in finance, why do some cities become financial hubs, bottom line.

  • International Markets

The World's Leading Financial Cities

articles financial education

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

articles financial education

A financial center or hub is a city that is strategically located and has a concentration of top-tier financial institutions, reputable stock exchanges, public and private banks, trading firms, major insurance companies. It should also have first-class infrastructure, communications and commercial systems, and a transparent and stable legal and regulatory regime. These cities are favored destinations for professionals because of their high living standards, growth opportunities, and for being at the center of the financial action. But you don't need to visit or live and work in them to be touched by how they shape the world's markets.

Key Takeaways

  • Cities that are concentrations of commerce, trading, real estate, and banking tend to become global financial hubs.
  • These important cities employ a large number of financial professionals and are home to stock exchanges and corporate headquarters for investment banks.
  • Found around the world, examples include New York City, Frankfurt, and Tokyo.

Here is a look at the top financial hubs across the globe, ordered by their listing in the Global Financial Centres Index (GFCI), which drew on data from the United Nation's ICT Development Index, the World Economic Forum's Networked Readiness Index, and the World Bank's ratings on government effectiveness, among 151 other metrics and survey data. We begin with the top five before turning to a selection from the GFCI list to indicate the diverse qualities that make particular cities rank among the world's most important financial centers.

New York, ranked first in the Global Financial Centres Index, is frequently regarded as the world's preeminent financial center.  It also consistently ranks as the world's  wealthiest . New York is famed for being home to Wall Street, the location of the New York Stock Exchange (NYSE) and Nasdaq, the first and second largest stock exchanges by market capitalization (about 25.2 and 20.6 trillion as of late 2023, respectively). Most of the world's largest companies ensure they have an office, if not their headquarters, in the city, including some of the largest investment banks: Goldman Sachs, Morgan Stanley, Merrill Lynch, and JP Morgan.

New York was the U.S.'s first federal capital, and it's been the home of the country's major financial markets since the NYSE opened trading under a buttonwood tree on Wall Street in 1792. Today, the area around Wall Street in Lower Manhattan is the world's most important financial district, with the street a metonymy when people discuss finance in languages worldwide. Another locus for finance is Midtown Manhattan, which houses the headquarters of major investment banks, hedge funds, and law firms. It's also a central global player in asset management, with firms managing trillions of dollars in assets, as well as major firms in foreign exchange, financial technology, insurance, and private equity.

Despite headlines (and not a few flush faces in the U.K. capital) in 2021 from Paris surpassing it for a time as Europe's largest securities trading center post-Brexit, London is not just an important European hub, but a global one. The city is one of the most visited places on earth and is among the most preferred places to do business. London is a well-known center for foreign exchange and bond trading in addition to banking activities and insurance services.

London's financial roots are deep: the Bank of England was established in 1694 (it remained a private bank until the end of World War II), and the London Stock Exchange, formed in 1801, was long the world's chief financial market, the backbone of a colonial empire that spanned the world.

At the heart of London is the Square Mile, usually just called “the City” and the historic financial district that remains its nucleus. The area is the site of the Bank of England , the second oldest central bank in the world, which manages the U.K. monetary system. The City of London is also the seat of the London Stock Exchange, which in late 2023 retook the title as the largest stock exchange in Europe. Another financial behemoth is the London Bullion Market, which is the world's largest for gold and silver bullion trading. In addition, London is important in the insurance industry, with venerable institutions like Lloyd's of London being a significant insurance and reinsurance firm.

Another financial hub in London is Canary Wharf in the East End, a modern counter to the traditional Square Mile. Characterized by sleek skyscrapers, it's the site of London's leading banks and professional services firms. Meanwhile, Lombard Street, a historic center for banking and finance, remains an integral part of making London a financial powerhouse.

Due to regulatory and other changes post-Brexit, much remains uncertain about London's status, though it's likely to remain a global financial hub.

Singapore, a small island nation in Southeast Asia, has remarkably transformed its economy in recent decades to emerge as one of the Four Asian Tigers and a major financial center belied by its geographic size. This transformation, bringing it to third place in the GFCI, is all the more noteworthy considering the nation’s limited land and resources. Singapore’s financial markets are both diverse and specialized, and they are central for trade in chemicals, biomedical sciences, petroleum refining, mechanical engineering, and electronics.

One reason for Singapore’s financial status is its status as a tax haven . It offers favorable tax policies for individuals and corporations, attracting significant capital in the insurance, wealth management, and private banking industries. (It doesn’t tax capital gains.) Singapore’s financial sector and deep capital markets are supported by a strong regulatory framework overseen by the Monetary Authority of Singapore.

Singapore’s workforce is tech-savvy and highly educated with specialized and adaptable skills. Its professionals include people of Chinese, Malay, and Indian origin who are proficient in English and several regional languages, making them a central reason for the city-state’s global status as a financial gateway to Asia’s markets.

The city-state’s key financial districts are geographically centralized. The Central Business District includes Raffles Place, Shenton Way, and Marina Bay, which are collectively home to influential international banks, financial institutions, and the Singapore Stock Exchange, making the district the nerve center of finance in the city. The newer Marina Bay area, with ultramodern infrastructure and architecture, has become a symbol of Singapore’s rapid economic development. Its expanding roster of luxury hotels and high-end shopping “experiences” also points to a common trait on this list, namely the vast wealth and inequalities found in many of these cities.

Hong Kong's position as a global financial center is intertwined with its colonial past and strategic geographical position. The city was a crucial trading port in the 19th century as a British colony, making the city one that was warred over for place in international trade, particularly between the West and China. The Hong Kong Stock Exchange was established in 1891. However, the city's financial industry didn't begin its precipitous growth until after World War II, when Hong Kong rapidly industrialized. By the 1980s, the city was a global hub for banking and finance.

The handover of Hong Kong to China at the end of the 20th century has given an uneasy role for those living in Hong Kong. Its markets provide an opening to Chinese industries while investors there navigate an evolving political landscape and its effect on the economy. Hong Kong's judicial and legal system remains stable, while its favorable tax system, characterized by very few and low tax rates , is another draw for businesses located in the city.

A substantial portion of Hong Kong's professionals are employed in financial services, trade, and logistics, and its workforce is supplemented by many thousands of multicultural and international professionals. Hong Kong's finance professionals are centered in the Central District, the heart of Hong Kong's financial activities and home to many multinational banks, major corporations, and the Hong Kong Stock Exchange . The Admiralty is located next to the Central District, home to many high-end office towers housing financial and legal firms.

San Francisco is the financial capital of the western U.S. There are many brokerage and banking firms with offices in the San Francisco area, such as Franklin Templeton Investments, headquartered in nearby San Mateo. It's also the gateway to nearby Silicon Valley . As such, the city focuses on the technology industry, and the Bay Area serves as the unofficial worldwide headquarters of the venture capital industry.

People have sought vast riches in the city since it became a financial center on the heels of the California Gold Rush in the mid-19th century. Throughout the 20th century, San Francisco grew as a financial hub, with several major banks and financial institutions establishing their headquarters there. The city's financial sector later diversified beyond traditional banking, incorporating investment, insurance, and other services.

But it's been the post-1970s growth of the tech sector in and around the city that makes it a financial powerhouse. Many in the city are employed in the tech industry, which overlaps with the financial sector in areas like fintech and venture capital. Besides nearby Silicon Valley, its core financial areas include the Financial District, the location for the region's major banks, investment firms, and headquarters. South of Market is the area of the city that's traditionally been more tech-focused, and it's where you'll find major fintech companies that bridge the gap between finance and technology.

Shanghai is the world’s third most populous city, behind Tokyo and Delhi. The Chinese government has long had ambitions of turning Shanghai into an international financial center. Historically, Shanghai emerged as a significant trade port in the 19th century when it was caught between competing colonial powers. The city’s financial landscape changed dramatically post-1990 in reaction to China’s broader economic reforms. Shanghai rapidly modernized its financial infrastructure, and the Shanghai Stock Exchange (SSE) , now the world’s third-largest by market capitalization, was established in 1990.

The SSE is mainland China’s preeminent stock market in terms of turnover, tradable market value , and total market value. The SSE had a market cap of $6.4 trillion as of December 2023. The China Securities Regulatory Commission directly governs the SSE. The exchange is considered restrictive in terms of trading and listing criteria.

The city is a magnet for both domestic and international talent, found mostly in two of Shanghai’s key financial areas. Lujiazui, located in the Pudong district, is often described as China’s Wall Street, and it’s home to the SSE and a bevy of major financial institutions and multinationals. Another district, the Bund, was historically the financial center of Shanghai. Its iconic colonial-era buildings now frequently serve as offices for financial firms and luxury hotels.

GFCI's list includes cities that may not rank in the top five, but are regional powerhouses that show the range of hubs captured by the list.

Chicago owes its fame in finance to the derivatives market of the Chicago Board of Trade , which began trading in commodity futures in 1848. It is the oldest futures exchange in the world and the second largest by volume, behind the National Stock Exchange of India.

The Chicago-based Options Clearing Corporation clears all U.S. option contracts.  Chicago is also the headquarters of over 400 major corporations, and the state of Illinois has more than 30 Fortune 500 companies, many of which are located in Chicago: State Farm Insurance, Boeing, Archer Daniels Midland, and Caterpillar.

Chicago has greatly diversified its economy since its beginnings in commodities trading and meat production. It is now a major center in risk management , information technology, manufacturing, and health.

Zurich, the largest city in Switzerland, has historically been a global financial center. The city has a disproportionately large presence of financial institutions and banks and has developed into a hub for insurance and asset management companies. Its low taxes make Zurich a destination for investment capital, and the city attracts a large number of international companies.

Switzerland’s primary stock exchange, Zurich’s SIX Swiss Exchange , is one of the world’s largest, with a market capitalization of $1.61 trillion as of December 2023.

Tokyo is the capital of the third-largest economy in the world and a major financial center. The city is the headquarters of many of the world’s largest investment banks and insurance companies. It is also the hub for the country’s telecommunications, electronic, broadcasting, and publishing industries.

The Japan Exchange Group, established in 2013 by combining the Tokyo Stock Exchange Group and the Osaka Securities Exchange, had a market capitalization of $5.5 trillion as of December 2023. The Nikkei 225 and the TOPIX are the main indexes tracking its moves.

Frankfurt is home to the European Central Bank and the Deutsche Bundesbank, the central bank of Germany. It has one of the busiest airports in the world and is the address of many top companies, national, and international banks.

In 2014, Frankfurt became Europe's first renminbi  payment hub. Frankfurter Wertpapierbörse, the Frankfurt Stock Exchange, is among the world’s largest stock exchanges. It had a $2.05 trillion market capitalization as of September 2023.  

Cities need to serve as a major place of commerce to grow into a financial hub. Historically, trade relied heavily on ships that traveled over water, so many financial hubs are major ports or located on major rivers.

According to the government of New York City, more than 330,000 people work in financial services in the city. The city's population is 8.34 million, meaning that about 4% of people in the city work in finance.

Economists have developed “cluster theory” to explain why cities may turn into financial hubs. The idea behind it is that firms in the same industry, such as finance, often locate near each other because it makes it easier for businesses to hire workers. If most finance companies are in the same area, most people who want to work in that industry will naturally gravitate to that area, meaning businesses will not have to convince potential workers to move for a new job.

Financial hubs that have been uncontested leaders in the past are now facing stiff competition from existing players and emerging and vibrant entrants. From facilitating immense financial transactions to driving innovations in banking and investment, these hubs are more than just economic centers; they are the engines of global finance. Their collective impact extends far beyond their geographical boundaries, influencing economic trends and policies across an interconnected global economy.

Long Finance and Financial Centre Futures. " Global Financial Centres Index: Methodology ."

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Financial Centre Futures. " The Global Financial Centres Index 34. " Page 2.

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Bank of England. " Monetary Policy ."

Bank of England. " Banknotes ."

Euronews. " London Wins Back Title as Europe's Largest Stock Market From Paris. "

London Bullion Market Association. " LBMA Trade Data ."

Economic & Commerce Data. " Financial Centres of the World: Singapore ."

Inland Revenue Authority of Singapore. " Gains from Sale of Property, Shares, and Financial Instruments ."

Government of Singapore. " Singapore Citizens By Age Group, Ethnic Group And Sex, End June, Annual ."

World Population Review. " World City Populations 2023. "

TradingHours. " SSE Trading Hours & Market Holidays ."

CME Group. " Timeline of CME Achievements ."

Options Clearing Corporation. " What is OCC? "

Fortune. " Fortune 500 - 2023 - IL ."

Deloitte. " Corporate Tax Rates 2020 ," Page 22.

SIX Swiss Stock Exchange. " Equity Capital at the Swiss Stock Exchange ."

World Bank. " Gross Domestic Product 2022 ," Page 1.

Japan Exchange Group. " Market Capitalization ."

Deutsche Bundesbank. " Renminbi clearing in Frankfurt ."

CEIC. " Germany Market Cap: Frankfurt Stock Exchange: Domestic Shares. "

NYC.gov." Finance Industry. "

U.S. Census Bureau. " QuickFacts: New York City, New York ."

Harvard Business Review . " Clusters and the New Economics of Competition ."

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Hawaiʻi credit union offering 7 free financial education webinars

Hawaiʻi State Federal Credit Union is offering seven free financial education webinars from January to March.

They will be led by expert financial educators who will provide financial tips during interactive  lessons. To register, go to HawaiiStateFCU.com/events . 

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“We are pleased to once again offer these free webinars to help our members and the  community-at-large to learn new financial wellness tips so they can feel confident about their  finances,” Andrew Rosen, president and CEO of Hawaii State FCU, said in a press release.

The schedule: 

Wednesday, Jan. 17:

Understanding Your Credit Report & Score (10-11 a.m.) This webinar will provide an in-depth look at the factors impacting a credit score, how to build or improve a credit score, and debunk common credit myths. 

Affordable Lending Home Buyers Programs  (12–1 p.m.) This is ideal for first-time home buyers and anyone who wants a refresher course on  the home buying process. Attendees will learn about Hawaiʻi State FCU’s 100% Financing Program, State of Hawaiʻi Mortgage Credit  Certificate, City and County Down Payment Assistance, and more.

Wednesday, Jan. 24:  

Reaching Your Financial Goals in 2024  (8 – 8:45 a.m.) The new year is the ideal time to set financial goals. Attendees will learn how to set achievable goals, better understand financial  habits, and how to navigate potential setbacks. 

Thursday, Feb. 15:  

Your Money 101: Teaching Kids About Money  (10 – 11 a.m.) Learn ways to teach kids about finances and how to weave financial lessons into daily life. From parents to educators, or anyone who works with children, this webinar will provide strategies on how to set young keiki up for a financially  healthy future.  

Choosing the Right Mortgage for You  (12 – 1 p.m.) From first time home buyers to experienced investors, anyone who is curious about mortgage financing options will benefit from this webinar. Explore a range  of mortgage options, learn more about a 2-1 buy down, and gain valuable  knowledge to better navigate the real estate purchasing journey. 

Wednesday, March 13 

Steps to Financial Freedom  10 – 11 a.m. Attendees will learn more about how to set financial goals, how to create a budget, and gain valuable insights about how to use credit wisely.  Receive step-by-step guidance on curating a financial plan that is tailored to lifestyle and needs. 

Building Wealth Through Real Estate  (12 – 1 p.m.) Future homebuyers and investors alike will have an opportunity to learn tips about how to purchase an investment property and how to utilize an existing property as an additional stream of income.  

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