Presentation to the 2010 IFIE/IOSCO Investor Education Conference

Annamaria Lusardi, Dartmouth College and The George Washington School of Business

November 8-9, 2010

Emerging Best Practice: Using the Best Thinking and Tools to Improve

the Effectiveness of Investor Education

Relevance

Individuals are increasingly in charge of their financial well-beingChanges in the pension landscape

More individual accountsChanges in the labor markets

Increased mobilityChanges in the financial markets

Increased complexity

A new economic landscape

The “great risk shift”

How well-equipped are people to make these decisions and what can financial education do?

Financial education

Levels of financial literacy are very low in both developed and developing countries

Financial education is essential but faces many barriers Costs Benefits tend to be in the long run Evaluation and effectiveness

Critical role of financial education

Measuring Financial Literacy (I)

“Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?”

i) more than $102; ii) exactly $102; iii) less than $102; iv) don’t know (DK); v) refuse to answer.

To test numeracy and understanding of interest rates, we asked:

Measuring Financial Literacy (II)

“Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy:”

i) more than today with the money in this account;

ii) exactly the same as;

iii) less than today

iv) DK;

v) refuse.

To test understanding of inflation, we asked:

Measuring Financial Literacy (III)

“Do you think the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.”

i) true;

ii) false;

iii) DK;

iv) Refuse.

Finally, to test understanding of risk diversification, we asked:

US National Financial Capability Study

1. National Survey: Nationally-projectable telephone survey of 1,488 American adults

2. State-by-State Survey: Online survey of approximately 25,000 respondents (roughly 500 per state + DC)

3. Military Survey: Online survey of 800 military personnel and spouses

The 2009 National Financial Capability Study includes three linked surveys:

Distribution of Responses to Financial Literacy Questions (%)

NB: Only 30% correctly answer all 3 questions correctly; less than half (46%) got the first two questions right.

Responses

Correct Incorrect DK Refuse

Interest rate 65% 21% 13% 1%

Inflation 64% 20% 14% 2%

Risk diversif. 52% 13% 34% 1%

How much do Americans know?

Distribution of responses across the US population

Financial Literacy around the World (FLat World)

These questions have been added to national surveys in:

Germany The Netherlands Italy Sweden Japan New Zealand Russia India

Findings are similar or worse than in the United States

Linking Financial Literacy to Behavior

•Debt and debt management

•Investments

•Planning and wealth accumulation

Financial literacy and mortgages

Studies show that those with low literacy are more likely to take up high cost mortgages

Those with low education are less likely to refinance mortgages during a period of falling interest rates

Lessons learned

Financial decisions are interrelatedCannot focus on investment or asset building

only

Limitations of disclosure and regulation Individuals do not read or understand financial matters

One size does not fit all

Critical role of financial education

Some suggestions

“How to increase the effectiveness of financial education and saving programs”.

Ideal venues to provide education

Employer-provided financial education Most people are at work

Financial education in school Most young people are in school We need education before individuals engage in financial

contracts

Financial education by the Treasury/Central bank/Regulatory authority Interest in good functioning of financial markets

Where to provide financial education

How to help people in making financial decisions

The Dartmouth ProjectSimplify financial

decisionsProvide information when

needed by individuals Target specific groupsUse communication that

does not rely on figures and numeracy

The Dartmouth Project: Planning Aid

Together with Punam Keller, I designed a planning aid intended to help college staff enroll in the college supplementary retirement account (SRA)

Most people plan on electing a supplemental retirement account, but feel they don’t have the time or information right now. We have outlined 7 simple steps to help you complete the election process. It will take between 15 – 30 minutes, from start to finish. It will take less time for you to start to insure your future than it takes you to unload your dishwasher!

Don’t give up! Contact the Benefits Office (6-3588) if for any reason you could not complete the online application.

It takes no time to prepare for your lifetime!

The Dartmouth Project: Planning Aid

In their own words : Four stories

Ron Whitcomb works in Facilities Operations & Management's Custodial Services. He has been with the College for fourteen years.

Topics discussed: Hopes for Retirement Parents as Role Models Why I Save Ron's Recommendations Planning for the Future

Program Effectiveness

30 days After Hire

60 days After Hire

Number of Observations

Control Group

7.3% 28.9% 210

7-Step

Planning aid

21.7% 44.7% 166

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

Provide good “nudges”

Automatically enroll workers into pensions at a set contribution rate and allocate their money into a life-cycle fund

Simple behavioral changes by employers can help:

Develop default options for other products as well

Add financial literacy to default options

Simplification and communication

Simplify decision-making

Use simple communication methods

As simple as a traffic light (chapter 4)

Financial education in schoolChapter 9 shows that the small proportion of young people (7%) who are financially knowledgeable are

Male White From college educated families

U.S. Financial literacy challenge: Test to measure financial knowledge in

participating schools

Programme for International Student Assessement (PISA)

Measure financial literacy among 15-years old in 19 countries in 2012

More on Financial education

Link financial education to other programs Entrepreneurship

Take into consideration different ways of learning

Videogames

Be realistic about outcomes A one-time retirement seminar does not

transform individuals into “investment wizards”

Video game: Celebrity Calamity

Project with Doorways to Dreams (founder is from Harvard Business School)

Avoid high interest rate debt

Exploit the power of interest compounding

Take advantage of tax incentives and employers‘matches

Plan for your future

Diversify your investments

Invest in low fees index funds

Rely on reliable information

Monitor Investment & Savings

Take time to choosethe right investment for you

Avoid too good deals

Make your money last a lifetime

The Saving Pyramid

Learning from other countries (chap 13)

Example: New Zealand’s Sortedhttp://www.sorted.org.nz/

New web site in the US: mymoney.govhttp://www.mymoney.gov/

Financial literacy web-site: A reliable, independent, and expert source of information

Concluding comments

Need to equip individual with tools to make decisions - Individuals make many financial decisions and

these decisions are interrelated

Costs of financial illiteracy at both the individual and macro level

Financial literacy is a necessary skill, like reading and writing