Showing papers by "Annamaria Lusardi published in 2012"

Financial Literacy, Retirement Planning and Household Wealth†

Abstract: Relying on comprehensive measures of financial knowledge, we provide evidence of a strong positive association between financial literacy and net worth, even after controlling for many determinants of wealth. We discuss two channels through which financial literacy might facilitate wealth accumulation. First, financial knowledge increases the likelihood of investing in the stock market, allowing individuals to benefit from the equity premium. Second, financial literacy is positively related to retirement planning and the development of a savings plan has been shown to boost wealth.

Financial Literacy: Implications for Retirement Security and the Financial Marketplace

Abstract: 1. The Outlook for Financial Literacy PART I. FINANCIAL LITERACY AND FINANCIAL DECISION MAKING 2. Financial Literacy and Planning: Implications for Retirement Wellbeing 3. Pension Plan Distributions: The Importance of Financial Literacy 4. Financial Literacy and 401(k) Loans 5. Financial Illiteracy and Stock Market Participation: Evidence from the RAND American Life Panel PART II. EVALUATING FINANCIAL LITERACY INTERVENTIONS 6. Fees, Framing, and Financial Literacy in the Choice of Pension Manager 7. Investor Knowledge and Experience with Investment Advisers and Broker-Dealers 8. Pecuniary Mistakes? Payday Borrowing by Credit Union Members 9. Annuities, Financial Literacy and Information Overload PART III. SHAPING THE FINANCIAL LITERACY ENVIRONMENT 10. Financial Counseling, Financial Literacy, and Household Decision Making 11. Time Perception and Retirement Saving: Lessons from Behavioral Decision Research 12. Making Savers Winners: An Overview of Prize-Linked Saving Products 13. How to Improve Financial Literacy: Some Successful Strategies 14. Bringing Financial Literacy and Education to Low and Middle Income Countries 15. Improving Financial Literacy: The Role of Nonprofit Providers

Numeracy, financial literacy, and financial decision-making

Abstract: Financial decisions, be they related to asset building or debt management, require the capacity to do calculations, including some complex ones. But how numerate are individuals, in particular when it comes to calculations related to financial decisions? Studies and surveys implemented in both the United States and in other countries that are described in this paper show the level of numeracy among the population to be very low. Moreover, lack of numeracy is not only widespread but is particularly severe among some demographic groups, such as women, the elderly, and those with low educational attainment. This has potential consequences for individuals and for society as a whole because numeracy is found to be linked to many financial decisions. Now more than ever, numeracy and financial literacy are lifetime skills necessary to succeed in today's complex economic environment.

Financial Literacy and the Financial Crisis

Abstract: The ability of consumers to make informed financial decisions improves their chances of having sound personal finance. This paper uses a panel dataset from Russia, where consumer loans grew at an astounding rate -- from about US$10 billion in 2003 to over US$170 billion in 2008 -- to examine the importance of financial literacy and its relationship with behavior. The survey asked questions on financial literacy, consumer borrowing (formal and informal), and spending behavior. The paper studies the consequences of greater financial literacy on the use of financial products and financial planning. Even though consumer borrowing rose rapidly in Russia, only 41 percent of the survey respondents understood how interest compounding worked and only 46 percent could answer a simple question about inflation. Financial literacy is positively related to participation in financial markets and negatively related to the use of informal sources of borrowing. Individuals with higher rates of financial literacy are significantly more likely to report having more unspent income at the end of the month and higher spending capacity. The relationship between financial literacy and the availability of unspent income is more evident during the financial crisis, suggesting that better financial literacy may better equip individuals to deal with macroeconomic shocks.

Numeracy, financial literacy, and financial decision-making

Abstract: NBER WORKING PAPER SERIESNUMERACY, FINANCIAL LITERACY, AND FINANCIAL DECISION-MAKINGAnnamaria LusardiWorking Paper 17821http://www.nber.org/papers/w17821NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts AvenueCambridge, MA 02138February 2012This paper was invited to be written for Numeracy, the open-access, peer-review journal of the NationalNumeracy Network. I would like to thank Dorothy Wallace, from the department of Mathematicsat Dartmouth College, for encouraging me to write this review article. Audrey Brown provided excellentresearch assistance. All errors are my own. The views expressed herein are those of the author anddo not necessarily reflect the views of the National Bureau of Economic Research.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 officialNBER publications.© 2012 by Annamaria Lusardi. All rights reserved. Short sections of text, not to exceed two paragraphs,may be quoted without explicit permission provided that full credit, including © notice, is given tothe source.

Numeracy, Financial Literacy, and Financial Decision-Making

Abstract: Financial decisions, be they related to asset building or debt management, require the capacity to do calculations, including some complex ones. But how numerate are individuals, in particular when it comes to calculations related to financial decisions? Studies and surveys implemented in both the United States and in other countries that are described in this paper show the level of numeracy among the population to be very low. Moreover, lack of numeracy is not only widespread but is particularly severe among some demographic groups, such as women, the elderly, and those with low educational attainment. This has potential consequences for individuals and for society as a whole because numeracy is found to be linked to many financial decisions. Now more than ever, numeracy and financial literacy are lifetime skills necessary to succeed in today's complex economic environment.

How financially literate are women? Some new perspectives on the gender gap*

Abstract: Policy Recommendations Levels of financial literacy are modest in many developed countries. One group that shows consistently low levels of financial literacy across countries is women. Because of lower income earned during their working lives, interrupted employment histories, and longer life expectancies, women are at risk of having inadequate retirement resources. Moreover, women are very likely to spend at least part of their retirement years as widows. Financial literacy has been linked to better retirement planning, higher wealth accumulation, and savvier financial decision-making. Because individuals are increasingly personally responsible for their financial well-being before and after retirement, it is critically important that women’s financial knowledge is enhanced and that they become equipped with the tools that are needed to make informed saving decisions. To do so, it is necessary to: (1) Target financial education to women. Due to their lower financial literacy and their awareness of their lower knowledge, women can profit substantially from targeted financial education programs. (2) Consider alternative ways of tailoring pension and financial communication to women. Because of their lower financial literacy, the way questions are framed may play a more important role for women than men. (3) Rethink the role of professional financial advice and consider how advisors can help women improve their financial decisions. Financial advisors are mostly used by individuals with high financial literacy, and it can be hard to judge the quality of their advice. Independent and easily understandable advice may thus be crucial to the financial decisionmaking of women, especially because women and men may benefit from different modes of advice.

Financial Literacy and Financial Decision-Making in Older Adults

Abstract: An economist's look at the level of financial knowledge among elders, and the quality of their financial decision-making In the United States and other industrialized countries around the world, individuals and their families are increasingly responsible for securing their own financial well-being Prior to the 1980s, many US workers relied for their retirement income mainly on Social Security and on employersponsored defined benefit (DB) pension plans Today, in contrast, baby boomers are increasingly relying on defined contribution (DC) plans and Individual Retirement Accounts (IRA) to finance their golden years Indeed, in 1980, about 40 percent of private sector pension contributions went to DC plans; by the year 2000, almost 90 percent of such contributions went to personal accounts-mostly 401(k) plans (Poterba, Venti, and Wise, 2008) The transition to the DC retirement saving model has the advantage of permitting more worker flexibility and labor mobility than in the past, yet it also imposes a greater responsibility on individuals to save, invest, and later decumulate their retirement wealth sensibly Furthermore, the spread of DC plans means that workers today are directly and immediately exposed to financial market risks, a reality that was less evident in the old DB system Many DB plans have been frozen or terminated, and individually managed accounts will increasingly become the mainstay of retirement For these reasons, individuals are increasingly called to "roll their own" retirement saving and decumulation plans, and their financial security in retirement will depend upon their own financial decisions and behavior At the same time, the financial landscape has become more challenging for the individual investor Financial markets have become more complex, offering products that are often difficult to understand Moreover, new products and financial services have become increasingly accessible to the small investor, and the expansion of consumer credit has increased opportunities to borrow Whether individuals-in particular, older individuals- are equipped to deal with this new financial landscape is an important question that has implications for both policy and for care providers This article provides some evidence on what we know about both the level of financial knowledge among the elderly, and the quality of their financial decision-making What Is Financial Literacy? Together with Olivia Mitchell, I designed a survey module to measure financial literacy, defined as the knowledge of basic financial investment concepts such as inflation and risk diversification and the capacity to do calculations related to interest rates (Lusardi and Mitchell, 2011a) The questions asked in this survey module, which first appeared in the 2004 Health and Retirement Study (HRS)- a survey covering respondents who are ages 50 and older- are as follows: Suppose you had $100 in a savings account and the interest rate was 2% per year After 5 years, how much do you think you would have in the account if you leftthe money to grow: more than $102, exactly $102, less than $102? Do not know; refuse to answer Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account? Do not know; refuse to answer Do you think that the following statement is true or false? "Buying a single company stock usually provides a safer return than a stock mutual fund" Do not know; refuse to answer Assessing financial literacy and financial knowledge Responses to these three questions revealed a very low level of financial literacy among the older US population: only about one-half of the HRS respondents could do a simple 2 percent calculation and demonstrate an understanding of inflation; only one-third of respondents could correctly answer all three questions (Lusardi and Mitchell, 2011a) …

Financial Sophistication in the Older Population

Abstract: This paper examines data on financial sophistication among the U.S. older population, using a special-purpose module implemented in the Health and Retirement Study. We show that financial sophistication is deficient for older respondents (aged 55+). Specifically, many in this group lack a basic grasp of asset pricing, risk diversification, portfolio choice, and investment fees. Subpopulations with particular deficits include women, the least educated, persons over the age of 75, and non-Whites. In view of the fact that people are increasingly being asked to take on responsibility for their own retirement security, such lack of knowledge can have serious implications.

Financial Literacy and the Financial Crisis

Abstract: The ability of consumers to make informed financial decisions improves their ability to develop sound personal finance. This paper uses a panel dataset from Russia, an economy in which consumer loans grew at an astounding rate - from about US$10 billion in 2003 to over US$170 billion in 2008 - to examine the importance of financial literacy and its effects on behavior. The survey contains questions on financial literacy, consumer borrowing (formal and informal), saving and spending behavior. The paper studies both the financial consequences and the real consequences of financial illiteracy. Even though consumer borrowing increased very rapidly in Russia, the authors find that only 41% of respondents demonstrate understanding of the workings of interest compounding and only 46% can answer a simple question about inflation. Financial literacy is positively related to participation in financial markets and negatively related to the use of informal sources of borrowing. Moreover, individuals with higher financial literacy are significantly more likely to report having greater availability of unspent income and higher spending capacity. The relationship between financial literacy and availability of unspent income is higher during the financial crisis, suggesting that financial literacy may better equip individuals to deal with macroeconomic shocks.

Financial literacy and the financial crisis

Abstract: The ability of consumers to make informed financial decisions improves their chances of having sound personal finance. This paper uses a panel dataset from Russia, where consumer loans grew at an astounding rate -- from about US$10 billion in 2003 to over US$170 billion in 2008 -- to examine the importance of financial literacy and its relationship with behavior. The survey asked questions on financial literacy, consumer borrowing (formal and informal), and spending behavior. The paper studies the consequences of greater financial literacy on the use of financial products and financial planning. Even though consumer borrowing rose rapidly in Russia, only 41 percent of the survey respondents understood how interest compounding worked and only 46 percent could answer a simple question about inflation. Financial literacy is positively related to participation in financial markets and negatively related to the use of informal sources of borrowing. Individuals with higher rates of financial literacy are significantly more likely to report having more unspent income at the end of the month and higher spending capacity. The relationship between financial literacy and the availability of unspent income is more evident during the financial crisis, suggesting that better financial literacy may better equip individuals to deal with macroeconomic shocks.

Financial Sophistication in the Older Population

Abstract: This paper examines data on financial sophistication among the U.S. older population, using a special-purpose module implemented in the Health and Retirement Study. We show that financial sophistication is deficient for older respondents (aged 55+). Specifically, many in this group lack a basic grasp of asset pricing, risk diversification, portfolio choice, and investment fees. Subpopulations with particular deficits include women, the least educated, persons over the age of 75, and non-Whites. In view of the fact that people are increasingly being asked to take on responsibility for their own retirement security, such lack of knowledge can have serious implications.