Financial Literacy Trajectories Paul Gerrans paul.gerrans@uwa.edu.au Two roads diverged in a wood, and I I took the one less traveled by, And that has made all the difference. Robert Frost
Financial Literacy Trajectories Agenda Expected/average FL trajectories Australian evidence from new population data Success in impacting FL trajectories Recent (Australian) evidence of undergraduate students Periods of vulnerability to FL trajectory change Are some financial decisions more vulnerable? Micro & Macro example of decline in FL trajectory impact Issues in engaging individuals to support them
Financial Literacy Trajectories Financial Literacy Index -1 -.8 -.6 -.4 -.2 0.2.4.6 We acquire, & lose, financial literacy over life course Influential choice (Lusardi, Michaud, Mitchell 2017) Household, Income and Labour Dynamics in Australia Survey
Financial Literacy Trajectories Average Gender effects emerge early and persist after controlling for a range of factors -1 -.8 -.6 -.4 -.2 0.2.4.6 Financial Literacy Index -1 -.8 -.6 -.4 -.2 0.2.4.6 Financial Literacy Index -1 -.8 -.6 -.4 -.2 0.2.4.6 Financial Literacy Index Not significant Cf. PISA 2015 results
Financial Literacy Trajectories Financial Literacy Index -.8 -.6 -.4 -.2 0.2.4.6 Gender trajectories vary by education level e.g., women with a degree have a higher financial literacy level than males with year 11 qualification
5 Questions: Big 3 + OECD, 2011.6.7.8.9 1 Probability (0 to 1).6.7.8.9 1 Probability (0 to 1).4.6.8 1 Probability (0 to 1) Probability (0 (0 to to 1) 1).6.6.7.7.8.8.9.9 1.6.7.8.9 1 Probability (0 to 1) Some differ markedly by age Gender differences change over age Gender differences large Some differ markedly by age Trajectories vary by financial literacy concept Gender Some differences decline not persistently always clear
Message? Expect variation: Don t expect uniform outcomes when we start differently & have different trajectories Aligns with recent (more optimistic) meta analyses Kaiser, T., and L. Menkhoff, 2017, Does Financial Education Impact Financial Literacy and Financial Behavior, and If So, When?, The World Bank Economic Review 31, 611 630 intervention impacts are highly heterogeneous Income Gender composition Specific concept (e.g. debt behaviour)
Medium term evidence of interventions: Do outcomes from a broad, principles based, university level intervention persist? Attitudes Preferences Behaviours Financial Capability Financial Literacy Objective Units typically don t directly seek/advocate behaviour change
Semester course: undergraduate, principles unit, 2013 Objective Financial Literacy: Pre, Post, 3years Raw Score (Max 4) Score (Max 4) 0.37 Significant Effect Sizes 0.25 0.59 0.53 Score (Max 12) Overall Male Female Unit Control Basic result driven by female students
Completion of Unit Boosts Confidence/Self Efficacy (Subjective FL assessments) Rating: 1 (Extremely Poor) 7 (Extremely Good) Rating: 1 (Extremely Poor) 7 (Extremely Good) Rating: 1 (Extremely Poor) 7 (Extremely Good) Significant Effect Sizes persist after 3 years 0.17 0.21 0.89 0.52 Rating: 1 (Extremely Poor) 7 (Extremely Good) 0.99 0.37 0.67 Results more robust female students 0.53
Results Behaviour, Information Source 1.0 0.9 Probability 0.8 0.7 0.6.6.7.8.9 1 Predicted Probability Behaviour Track Emergency Predicted Probability of Behaviour: Unit and Control groups Pre 2013 Post 2013 FUP 2014 Survey Goal Budget FUP 2015 Pre Post 1yr 2yr 3yr Unit, Goal Unit, Budget Unit, Track Unit, Emergency Control, Goal Control, Budget Control, Track Control, Emergency FUP 2016 5.0 Frequency (1-Never 5-Always) 3 3.5 4 4.5 5 4.5 4.0 3.5 3.0 Behaviour Frequency Freq. of Positive (1 Behaviours Never 5 Always) Bills on time Afford Watch expenditure Consult 2013-Pre 2013-Post FUP 2014 FUP-2015 FUP-2016 Pre Unit, Afford Post Unit, Bills 1yr Unit, Watch2yr Unit, Consult 3yr Control, Afford Control, Bills Control, Watch Control, Consult High baseline scores remain, some effects dissipate NB. Traits important e.g. Future Time Perspective (amenable to intervention) 4.0 Importance (Max 5) 2 2.5 3 3.5 4 3.5 3.0 2.5 2.0 Pre 2013 Information Predicted Importance Importance of Information Sources (Max. 5) Post 2013 +ve ve Family Friends FUP 2014 Authority FUP 2015 Unsolicited Advertisements Unit-Ads Unit-Authority Unit-Fam/Friends Unit-Unsolicited Control-Ads Control-Authority Control-Fam/Friends Control-Unsolicited FUP 2016 Pre Post 1yr 2yr 3yr OECD INFE (2011) Common, shared effect: Students become more discerning!
In cross section rise, peak, decline Is this generational or age related decline? Financial Literacy Index -.8 -.6 Financial -.4 -.2Literacy 0 Index.2.4.6 -.8 -.6 -.4 -.2 0.2.4.6 -.8 -.6 -.4 -.2 0.2.4.6 Financial Literacy Index
Good News and Bad News Performance Good News: Ability to use learned knowledge & experience increases over time Crystallised Intelligence Overall Bad News: Ability to solve novel problems declines with age Fluid Intelligence Age Cattell R. B. (1987) Intelligence: Its structure, growth and action. New York: Elsevier.
Cognitive Function Tests by Age Fluid Score for 90 secs: 0 min 110 max 30 35 40 45 50 55 60 Your task is to fill each empty box with the number that matches the symbol using the key at the top of the page Score Words Correct: 0 min 25 max 8 10 12 14 16 18 20 Crystallised I want you to read slowly down the list of words on this card, reading each word out loud. After each word please wait until I say next before reading out the next word. Source: Household, Income and Labour Dynamics in Australia Survey
Change in Performance on Tests: 2016 score 2012 score Percent 0 5 10 15 20 Is FL trajectory of the Large Drop & Large Improvement Groups Different? Source: Household, Income and Labour Dynamics in Australia Survey
Does this matter for financial literacy & financial decision making? Perception vs Reality How do your mathematical skills compare to the average or typical Australian adult? Self-Rating 0(Very Poor) to 10(Very Good) 4 5 6 7 8 9 10 Those With Actual Decline Don t Rate Their Maths Skills Lower Probability.7.8.9 1 Probability.5.6.7.8.9 1 But They Perform Worse Objectively Probability Numeracy Correct But They Perform Worse Objectively Money Illusion Correct
Does this matter? Evidence: Retirement & workforce re entry (Australia) Trajectory downward when key retirement decisions made A large number (~180,000) re enter workforce having retired Women account for 60% Most common reason Women: Financial Need (47%), Bored/Need Something to Do (26%) Men: Bored/Need Something to Do (48%) Financial Need (34%) Many reasons, but both signify (at least) poor retirement planning including financial planning Costly individually and macro economically Australian Bureau of Statistics. (2017). Retirement and Retirement Intentions, Australia, July 2016 to June 2017. Cat. No. 6238.0. Available at http://www.abs.gov.au/ausstats/abs@.nsf/allprimarymainfeatures/cad65b89ac59461bca2581f7001548f1?opendocument
How to respond? Arresting Trajectory Differentiate decline due to: obsolescence, cognitive ability 1. E.g. I haven t previously worked out what happens when I both withdraw from my retirement savings as well as earn income from it rather than 2. E.g. I am more often acting impulsively with withdrawals from my retirement savings, without thinking through the consequences * 1. Benefits from employer provided, workplace interventions 2. Benefits from (requires) willingness to monitor Independently (e.g. surveys HABC), Clinically (e.g. MMSE, Cantab) Both need more research better mapping cognitive functioning to specific vulnerable financial behaviours * Adapted from an item in the Self Report Version of the Healthy Aging Brain Care (HABC) Monitor scale
Survey: Financial Literacy, Cognitive functioning Sources of Advice Attitudes, Preference to Monitoring Cognitive Performance 544 respondents Would you like to complete a cognitive skills test on an ipad or a computer? (similar to clinical tests of memory, processing speed) 519 Yes please 25 No thanks 331 completed 188 did not complete Would you like to complete the cognitive skills test again? 194 completed 137 did not complete Prefer to monitor At home 77% Local doctor 17% Prefer to monitor At home 65% Local doctor 35% 70% willing to pay 40% willing to pay
The challenge is to engage those not inclined to monitor: This group has lower levels of financial literacy Percent 0 5 10 15 20 25 Percent 0 5 10 15 20 25
The challenge is to engage those not inclined to monitor: This group also report more signs of cognitive decline Percent 0 5 10 15 20 25 e.g. Over the past 2 weeks, how often did you have problems with: Remembering appointment Percent 0 5 10 15 20 25
Summing up Financial literacy trajectories Emerge early Heterogeneous across individuals and financial literacy domain Recent meta analysis more optimistic Interventions can change trajectory Which persist into medium term (e.g. undergraduates) Trajectory through 50s and 60s trend down Vulnerable due to depreciation/obsolescence, decline (& possibly cohorts) (Re)investment in human capital also needed later in life Need better evidence on what type of decisions are vulnerable