Financial literacy and its consequences: Evidence from Russia during the financial crisis
TL;DR: In this paper, the authors examined the importance of financial literacy and its effects on behavior and found that individuals with higher financial literacy are significantly less likely to report experiencing a negative income shock during 2009 and have greater availability of unspent income and higher spending capacity.
Abstract: The ability of consumers to make informed financial decisions improves their ability to develop sound personal finance. This paper uses a panel data set from Russia, an economy in which household debt has grown at an astounding rate, to examine the importance of financial literacy and its effects on behavior. The paper studies both the financial and real consequences of financial illiteracy. Even though consumer borrowing increased very rapidly in Russia, only 41% of respondents demonstrate an understanding 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 less likely to report experiencing a negative income shock during 2009 and have greater availability of unspent income and higher spending capacity. The relationship between financial literacy and availability of unspent income is higher in 2009, suggesting that financial literacy may better equip individuals to deal with macroeconomic shocks.
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288 citations
TL;DR: In this article, the authors assess to what extent financial advisors can substitute for low financial knowledge and find that investors with a low level of financial literacy are less likely to consult with an advisor, while they delegate their portfolio choice more often or do not invest in risky assets.
Abstract: The low level of financial literacy across households suggests they are at risk of taking sub-optimal financial decisions. In this paper we assess to what extent financial advisors can substitute for low financial knowledge. We analyze the effect of investors' financial literacy on their demand of professional, non-independent advice. Using the 2007 Unicredit Customers' Survey we find that non-independent advisors are not sufficient to alleviate the problem of low financial literacy. Investors with a low level of financial literacy are less likely to consult with an advisor, while they delegate their portfolio choice more often or do not invest in risky assets. We explain this evidence with a highly stylized model of strategic interaction between investors and better informed advisors facing conflicts of interests. Advisors reveal information only to the more knowledgeable investors, who anticipating this are then more likely to consult with them.
220 citations
TL;DR: In this paper, a systematic and comprehensive meta-analysis of the literature on financial education interventions is presented, focusing on the financial education studies designed to strengthen the financial knowledge and behaviors of consumers.
Abstract: This paper presents a systematic and comprehensive meta-analysis of the literature on financial education interventions. The analysis focuses on financial education studies designed to strengthen the financial knowledge and behaviors of consumers. The analysis identifies 188 papers and articles that present impact results of interventions designed to increase consumers' financial knowledge (financial literacy) or skills, attitudes, and behaviors (financial capability). These papers are diverse across a number of dimensions, including objectives of the program intervention, expected outcomes, intensity and duration of the intervention, delivery channel used, and type of population targeted. However, there are a few key outcome indicators where a subset of papers are comparable, including those that address savings behavior, defaults on loans, and financial skills, such as record keeping. The results from the meta analysis indicate that financial literacy and capability interventions can have a positive impact in some areas (increasing savings and promoting financial skills such as record keeping) but not in others (credit default).
219 citations
Cites background or methods from "Financial literacy and its conseque..."
...Empirical studies confirmed this relationship, including Klapper et al. (2013), who utilize data from The World Bank Research Observer # The Author 2015....
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...Empirical studies confirmed this relationship, including Klapper et al. (2013), who utilize data from...
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TL;DR: In this paper, the authors analyzed the effect of investors' financial literacy on their decision to demand professional, non-independent advice and found that investors with a low level of financial literacy are less likely to consult an advisor, but they delegate their portfolio choice more often or do not invest in risky assets at all.
Abstract: The low level of financial literacy across households suggests that they are at risk of making suboptimal financial decisions. In this paper, we analyze the effect of investors’ financial literacy on their decision to demand professional, non-independent advice. We find that non-independent advisors are not sufficient to alleviate the problem of low financial literacy. The investors with a low level of financial literacy are less likely to consult an advisor, but they delegate their portfolio choice more often or do not invest in risky assets at all. We explain this evidence with a highly stylized model of strategic interaction between investors and better informed advisors with conflicts of interests. The advisors provide more information to knowledgeable investors, who anticipating this are more likely to consult them.
193 citations
TL;DR: In this paper, the authors review the literature on the measurement and determinants of financial literacy and assess the role of individuals' financial literacy for the use of professional financial advice and assess whether expert intervention can serve as a substitute to financial literacy.
Abstract: In this survey, we review the voluminous body of literature on the measurement and the determinants of financial literacy. Wherever possible, we supplement existing findings with recent descriptive evidence of German households’ financial literacy levels based on the novel Panel on Household Finances dataset, a large-scale survey administered by the Deutsche Bundesbank and representative of the financial situation of households in Germany. Prior research not only documents generally low levels of financial literacy but also finds large heterogeneity in financial literacy across the population, suggesting that economically vulnerable groups are placed at further disadvantage by their lack of financial knowledge. In addition, we assess the literature evaluating financial education as a means to improve financial literacy and financial behavior. Our survey suggests that the evidence with respect to the effectiveness of the programs is rather disappointing. We also review the role of individuals’ financial literacy for the use of professional financial advice and assess whether expert intervention can serve as a substitute to financial literacy. We conclude by discussing several directions for future research.
191 citations
Cites background or methods or result from "Financial literacy and its conseque..."
...In a recent large scale survey of financial literacy levels in more than 140 national economies, Klapper et al. (2015) elicit four quiz questions closely related to the Big Three....
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...…2010; Gathergood 2012), several other authors rely on more advanced techniques such as principal component analysis (e.g. Behrmann et al. 2012; Klapper et al. 2013; Lusardi et al. 2014), iterated principal factor analysis (e.g. van Rooij et al. 2011b), or cluster analysis (e.g. Lusardi and…...
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...In particular, financial literacy turns out to be considerably lower in transition economies and lower-income economies as compared to industrial economies, a finding which is also corroborated in the recently conducted Standard and Poors FinLit Survey (Klapper et al. 2015)....
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...In particular, financial literacy turns out to be considerably lower in transition economies and lower-income economies as compared to industrial economies, a finding which is also corroborated in the recently conducted Standard and Poors FinLit Survey (Klapper et al. 2015). According to Klapper et al. (2015) as well as our analyses of the data provided by the PHF survey, financial literacy levels of German citizens are among the highest in the world....
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...While some studies measure financial literacy using simple indicator variables (Jappelli 2010; Gathergood 2012), several other authors rely on more advanced techniques such as principal component analysis (e.g. Behrmann et al. 2012; Klapper et al. 2013; Lusardi et al. 2014), iterated principal factor analysis (e....
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References
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TL;DR: An assessment of a rapidly growing body of economic research on financial literacy and thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy are offered.
Abstract: This paper undertakes an assessment of a rapidly growing body of economic research on financial literacy. We start with an overview of theoretical research which casts financial knowledge as a form of investment in human capital. Endogenizing financial knowledge has important implications for welfare as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little) people know and identify the least financially savvy population subgroups. This is followed by an examination of the impact of financial literacy on economic decision-making in the United States and elsewhere. While the literature is still young, conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps. A final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy.
2,176 citations
"Financial literacy and its conseque..." refers background in this paper
...Recent studies have shown financial literacy to be a key determinant of household financial behavior (Lusardi and Mitchell, 2013)....
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TL;DR: In this article, the authors evaluated the importance of financial literacy by studying its relation to the stock market: are more financially knowledgeable individuals more likely to hold stocks? To assess the direction of causality, they make use of questions measuring financial knowledge before investing in the stock markets.
Abstract: Individuals are increasingly put in charge of their financial security after retirement. Moreover, the supply of complex financial products has increased considerably over the years. However, we still have little or no information about whether individuals have the financial knowledge and skills to navigate this new financial environment. To better understand financial literacy and its relation to financial decision-making, we have devised two special modules for the DNB Household Survey. We have designed questions to measure numeracy and basic knowledge related to the working of inflation and interest rates, as well as questions to measure more advanced financial knowledge related to financial market instruments (stocks, bonds, and mutual funds). We evaluate the importance of financial literacy by studying its relation to the stock market: Are more financially knowledgeable individuals more likely to hold stocks? To assess the direction of causality, we make use of questions measuring financial knowledge before investing in the stock market. We find that, while the understanding of basic economic concepts related to inflation and interest rate compounding is far from perfect, it outperforms the limited knowledge of stocks and bonds, the concept of risk diversification, and the working of financial markets. We also find that the measurement of financial literacy is very sensitive to the wording of survey questions. This provides additional evidence for limited financial knowledge. Finally, we report evidence of an independent effect of financial literacy on stock market participation: Those who have low financial literacy are significantly less likely to invest in stocks.
1,834 citations
TL;DR: In this paper, the authors present an assessment of a rapidly growing body of economic research on financial literacy and examine the impact of financial literacy on economic decision-making in the United States and elsewhere.
Abstract: This paper undertakes an assessment of a rapidly growing body of economic research on financial literacy. We start with an overview of theoretical research, which casts financial knowledge as a form of investment in human capital. Endogenizing financial knowledge has important implications for welfare, as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little) people know and identify the least financially savvy population subgroups. This is followed by an examination of the impact of financial literacy on economic decision making in the United States and elsewhere. While the literature is still young, conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps. A final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy. (JEL A20, D14, G11, I20, J26)
1,741 citations
TL;DR: In this article, the authors evaluated the importance of financial literacy by studying its relation to the stock market: are more financially knowledgeable individuals more likely to hold stocks? To assess the direction of causality, they make use of questions measuring financial knowledge before investing in the stock markets.
1,591 citations
Posted Content•
TL;DR: In this paper, the authors focus on four financial management activities (cash-flow management, credit management, saving, and investment) and analyze the connections between knowledge and behavior, finding that those who knew more were more likely to engage in recommended financial practices.
Abstract: Consumer financial literacy has become a growing concern to educators, community groups, businesses, government agencies, and policymakers Correspondingly, there has been an increase in the number and types of financial education programs available to households Many of these programs focus on providing information to consumers and operate under the implicit assumption that increases in information and knowledge will lead to changes in financial-management practices and behaviors ; This article focuses on four financial-management activities--cash-flow management, credit management, saving, and investment Data from the Surveys of Consumers are used to analyze some of the connections between knowledge and behavior--what consumers know and what they do Overall, financial knowledge was statistically linked to financial practices: Those who knew more were more likely to engage in recommended financial practices In addition, certain types of financial knowledge were statistically significant for particular financial practices--knowing about credit, saving, and investment was correlated with higher probabilities of engaging in recommended credit, saving, and investment practices respectively Although the causality could flow in either direction, this finding indicates that increases in knowledge may lead to improvements in financial-management practices Thus, financial education in combination with skill-building and audience-targeted motivational strategies may be one way to elicit the desired behavioral changes in financial-management practices
1,519 citations
"Financial literacy and its conseque..." refers background in this paper
...Hilgert et al. (2003) find a strong correlation between financial literacy and day-to-day financial management....
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