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Improving Financial
Education Efficiency
OECD-BANK OF ITALY SYMPOSIUM ON
FINANCIAL LITERACY
This work is published on the responsibility of the Secretary-General of the OECD. The
opinions expressed and arguments employed herein do not necessarily reflect the official
views of the Organisation or of the governments of its member countries.
This document and any map included herein are without prejudice to the status of or
sovereignty over any territory, to the delimitation of international frontiers and boundaries
and to the name of any territory, city or area.
Please cite this publication as:
OECD (2011), Improving Financial Education Efficiency: OECD-Bank of Italy Symposium on Financial
Literacy, OECD Publishing.
http://dx.doi.org/10.1787/9789264108219-en
ISBN 978-92-64-10790-8 (print)
ISBN 978-92-64-10821-9 (PDF)
Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda.

Revised version, December 2011
Details of revisions available at: http://www.oecd.org/dataoecd/46/27/49118283.pdf
© OECD 2011
You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and
multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable
acknowledgement of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should
be submitted to rights@oecd.org. Requests for permission to photocopy portions of this material for public or commercial use shall be
addressed directly to the Copyright Clearance Center (CCC) at info@copyright.com or the Centre français d’exploitation du droit de copie (CFC)
at contact@cfcopies.com.
FOREWORD
FOREWORD
The financial crisis focussed the attention of governments around the world on the critical need to
empower consumers through financial education. As governments launch new initiatives to improve
their population’s financial skills, demand has grown for research to guide the development of these
initiatives as well as tools to measure their impact and effectiveness. The OECD is working hard to
meet this demand, providing guidance to governments and other concerned stakeholders based on
research and tools developed over the past decade.
The OECD has published several recommendations, on principles and good practices for
financial education and awareness including for specific sectors such as credit, insurance and private
pensions.
Launched in 2008, the OECD hosts the International Network on Financial Education (INFE)
which facilitates information sharing, research and the development of good practices. Over 160
public institutions from over 80 countries are members of the INFE and contribute to the production of
data, analysis and guidance on key financial education issues.
To discuss this accumulated knowledge, and address emerging financial education issues, the
Bank of Italy and the OECD, in June 2010, held an International Symposium in Rome. This book
gathers the analytical work and reports prepared for the symposium. It represents an important
contribution to the global storehouse of knowledge and research about financial education. The issues
covered by this book include methods for measuring financial literacy and evaluating financial
education programmes as well as approaches to programme design that integrate the latest findings
from behavioural economics. Readers will find background information, supporting evidence and
practical recommendations from the best experts around the world.
The presentations of the main speakers are available on the OECD website at www.financialeducation.org .
Richard Boucher
Deputy Secretary-General
OECD
IMPROVING FINANCIAL EDUCATION EFFICIENCY: OECD-BANK OF ITALY SYMPOSIUM ON FINANCIAL LITERACY © OECD 2011
Ignazio Visco
Governor
Banca d’Italia
3
ACKNOWLEDGEMENTS
ACKNOWLEDGEMENTS
The OECD would like to thank the Bank of Italy for its co-operation in organising and hosting
the OECD-Bank of Italy International Symposium on Financial Literacy. The OECD is grateful to the
authors for their valuable contributions of each of the chapters contained in this volume. The views
expressed here are the sole responsibility of the authors and do not necessarily reflect those of the
OECD Committee on Financial Markets and the Insurance and Private Pensions Committee, the
OECD Secretariat, the member or non-member countries. The publication has been prepared by
Adele Atkinson and Flore-Anne Messy with assistance from Jennah Huxley and Edward Smiley in the
OECD Directorate for Financial and Enterprise Affairs.
4
IMPROVING FINANCIAL EDUCATION EFFICIENCY: OECD-BANK OF ITALY SYMPOSIUM ON FINANCIAL LITERACY © OECD 2011
TABLE OF CONTENTS
TABLE OF CONTENTS
Executive Summary ............................................................................................................................... 7
Part I
Monitoring financial literacy
and evaluating financial education programmes
Chapter 1. A framework for developing international financial literacy surveys
by Elaine Kempson ........................................................................................................... 13
1. Introduction .................................................................................................................................... 14
2. Who to survey ................................................................................................................................ 14
3. Survey method ............................................................................................................................... 16
4. Sampling ........................................................................................................................................ 19
5. Questionnaire design ...................................................................................................................... 21
6. Analysing and reporting the results................................................................................................ 25
Annex I. A1. Web links to survey reports and questionnaires .......................................................... 28
Annex I. A2. Financial literacy measurement questions and socio-demographics ........................... 30
Chapter 2. A framework for evaluating financial education programmes
by Annamaria Lusardi ........................................................................................................ 43
1. The issue: The necessity of evaluating financial education programmes ...................................... 44
2. Existing literature: Some difficulties in evaluating financial education programmes ................... 45
3. A five-tier evaluation framework ................................................................................................... 50
4. Implementation of the five-tier framework .................................................................................... 51
5. Analysis of the five tiers ................................................................................................................ 52
6. Recommendations .......................................................................................................................... 58
7. Conclusions .................................................................................................................................... 59
Notes .................................................................................................................................................. 60
References .......................................................................................................................................... 60
Part II
Behavioural economics and financial education
Chapter 3. Can behavioural economics be used to make financial education more effective?
by Joanne Yoong ................................................................................................................ 65
1. Introduction .................................................................................................................................... 66
2. Background and context................................................................................................................. 67
3. Behavioural economics and personal finance ................................................................................ 70
4. Applying behavioural economics to financial education ............................................................... 78
5. Behaviourally-motivated approaches to other policy instruments ................................................. 83
6. Conclusions .................................................................................................................................... 89
References .......................................................................................................................................... 90
IMPROVING FINANCIAL EDUCATION EFFICIENCY: OECD-BANK OF ITALY SYMPOSIUM ON FINANCIAL LITERACY © OECD 2011
5
TABLE OF CONTENTS
Chapter 4. Can economic psychology and behavioural economics help improve
financial education?
by Vera Rita De Mello Ferreira ....................................................................................... 103
1. Education, mind and behaviour – Where we stand ...................................................................... 104
2. Economic psychology or behavioural economics – Is there a difference? .................................. 106
3. A list of heuristics by Peter Earl .................................................................................................. 107
4. Financial education and economic psychology – A promising dialogue ..................................... 109
5. Conclusions .................................................................................................................................. 117
Notes ................................................................................................................................................ 118
References ........................................................................................................................................ 118
Part III
Importance of financial education in the context
of defined contribution pension plans
Chapter 5. Financial literacy and the shift from defined benefit
to defined contribution pension plans
by Annamaria Lusardi ..................................................................................................... 123
1. Introduction .................................................................................................................................. 124
2. Financial literacy .......................................................................................................................... 125
3. Financial education ...................................................................................................................... 125
4. Increasing the effectiveness of financial education programmes ................................................. 127
5. Automatic enrolment into pensions ............................................................................................. 129
6. Combining automatic enrolment and financial education............................................................ 130
Notes ................................................................................................................................................ 131
References ........................................................................................................................................ 132
Chapter 6. Auto-enrolment in private, supplementary pensions in Italy
by Ambrogio Rinaldi ....................................................................................................... 135
1. Introduction .................................................................................................................................. 136
2. Historical background .................................................................................................................. 136
3. Nation-wide auto-enrolment: “The TFR reform” ........................................................................ 138
4. The results .................................................................................................................................... 140
5. Explaining the results ................................................................................................................... 141
6. Some evidence on financial literacy and pension awareness among Italian workers .................. 144
7. Conclusions .................................................................................................................................. 146
Notes ................................................................................................................................................ 147
6
IMPROVING FINANCIAL EDUCATION EFFICIENCY: OECD-BANK OF ITALY SYMPOSIUM ON FINANCIAL LITERACY © OECD 2011
EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
This book draws together expert opinions and recommendations on a number of cutting edge issues
presented at the OECD-Bank of Italy Symposium on Financial literacy held in Rome on 9 June 2010. Such
issues include the measurement of financial literacy, the evaluation of financial education programmes and
the application of findings from behavioural economics, in order to improve financial education provision.
In Chapter 1 Professor Elaine Kempson of University of Bristol, UK summarises the various
approaches taken to measuring financial literacy at a national level, and makes recommendations for
developing a survey instrument that can be used to compare levels of financial literacy across countries.
Such an international measure of financial literacy is essential to identify those countries with particularly
successful financial literacy strategies and initiatives, which in turn can lead to benchmarking and crosscountry collaboration and synergies.
The chapter is based on a detailed investigation of 19 national and two international surveys of
financial literacy conducted within the framework of the INFE. It comprises a checklist of issues to be
considered when designing and commissioning a survey of financial literacy or capability, along with an
indication of good practice.
There are considerable similarities in the approaches taken to measuring financial literacy at the
national level, including the topics covered, the population surveyed and the approach taken to analysis.
These similarities make it possible to develop an international measure based on existing good practice
questions and survey methods and undertaken on a sample of adults, via interviews conducted in person or
over the telephone. It is recommended that the questionnaire covers the full range of topic areas typically
included in national surveys (i.e. day to day money management, financial planning, choosing appropriate
financial products and financial knowledge and understanding). The resulting data can then be analysed in
various ways including the development of a score or segmenting the population according to their
responses. These recommendations have been acted on, and the International Network on Financial
Education is currently piloting an international survey of financial literacy in 12 countries based on the
questionnaire in annex of this chapter.
In the following chapter (Chapter 2), the issue of evaluation is addressed. Professor Annamaria
Lusardi of Dartmouth College, USA reminds us that, when it comes to financial education, the question of
“what works best” has not yet been clearly answered and should be further explored in the future.
She particularly highlights that the benefits of programme evaluation, the verification of the use of
resources, the assessment of the impact of the programme and the effectiveness of the programme can be
further improved. For example, resources can be used more effectively and the overall impact of financial
education can be increased by using evaluation data to make decisions about which programmes should be
improved, which should be continued and whether any should be terminated.
The chapter discusses the challenges faced by evaluators, and explores the benefit of applying a
version of the Five-Tier Evaluation Framework modified by O’Connell in 2009. The five tiers within the
framework relate to i) the objectives of the programme, ii) inputs, iii) delivery, iv) outcomes and v) impact.
The framework offers financial educators a simple guide that can be followed when designing an
IMPROVING FINANCIAL EDUCATION EFFICIENCY: OECD-BANK OF ITALY SYMPOSIUM ON FINANCIAL LITERACY © OECD 2011
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EXECUTIVE SUMMARY
evaluation study. It has the advantage of allowing significant flexibility whilst still providing
standardisation and comparability. However, there are still potential pitfalls when such a framework is
used, for example, the programme needs to have clearly defined objectives in order to apply the framework
properly, and even then, the framework assumes a relatively simple programme design whereas in reality
programmes often have multiple delivery channels and target audiences. The length of time needed to
evaluate a programme in terms of its impact is also a potential problem, regardless of the method used.
The chapter ends with recommendations and conclusions, stressing that:
•
Evaluation is important and should be designed alongside the financial education programme
•
Employing quasi-experimental methods (ones that mimic scientific experiments in medicine, or
agriculture, for example) will give the evaluation added credibility and help to assess causality.
•
Employing professional evaluators, using evaluation toolkits/frameworks and subjecting
evaluation design and reporting to peer-review can all ensure that evaluations are robust and
comparable.
The second part of the book (Chapters 3 and 4) explores the extent to which the design of financial
education programmes could benefit from the findings of behavioural economists and economic
psychologists.
The standard economics approach to financial education argues that financial consumers will behave
in their own best interests if the financial market is perfectly competitive. The fact that they do not always
act in this way is blamed on a demand side market failure – consumers do not have all the knowledge and
information that they need. According to this analysis, the solution is therefore to provide information and
education so that consumers are fully informed and the market can function properly.
In contrast, the psychologists and behavioural economists argue that even with knowledge and
information, consumers still act in a way that is not in their own best interest. They do this because they
are subject to systematic, psychological influences. Given these psychological factors, financial education
needs to address the fact that consumers require tools to help them act in a way that improves their
financial wellbeing; just as dieters can benefit from tools to help them overcome a desire to over-eat.
Unlike the economists’ approach, this type of education does not need to focus specifically on knowledge
or information, but on new skills, self-awareness and techniques for self-improvement.
Chapter 3 by Joanne Yoong explains that the assumptions of rationality used by economists when
they explore financial behaviour may not be appropriate if actual behaviour contradicts these
approximations in systematic (rather than random) ways. The chapter investigates the extent to which
behavioural economics might explain some of the problematic financial behaviours that are observed
amongst consumers, including low levels of retirement saving and high levels of credit use. It also explores
possible ways in which behavioural economics can help policy makers to improve financial education,
from take-up to completion.
Attention is then turned to the complementary tools available to policy makers to help consumers
overcome psychological constraints. These include supervision and regulation of financial services, and the
design of default options. The primary conclusions that can be drawn from this chapter are:
•
8
Consumers could be made aware of their own psychological biases and the methods to combat
them through carefully designed diagnostic tools.
IMPROVING FINANCIAL EDUCATION EFFICIENCY: OECD-BANK OF ITALY SYMPOSIUM ON FINANCIAL LITERACY © OECD 2011
EXECUTIVE SUMMARY
•
Behavioural economics can be used to fine-tune a number of existing services and provisions to
help to improve the efficacy of financial education. For example, it can be incorporated within
the design of administrative processes, marketing materials, educational materials and delivery
mechanisms to improve take-up of education and relevant products, increase behaviour change
following education and incentivise commitment and sustained behaviour.
•
Financial education is only one of the relevant approaches that can be taken to help people avoid
the consequences of unwanted psychological traits, and should be used alongside other policy
tools such as regulation and product design. All of these tools can incorporate lessons from
behavioural economics.
Chapter 4 by Vera Rita de Mello Ferreira asks whether economic psychology and behavioural
economic can help to improve financial education. It starts by noting that the provision of knowledge and
information in itself is not sufficient; the information must be incorporated into daily life. It then goes on
to describe an innovative solution developed for Brazilian school children. The approach combines
information and recommendations about personal financial issues with information about the way in which
psychological factors may both help and hinder behaviour. This psychological guidance is intended to
raise the pupil’s awareness of their own traits and trigger discussions about the typical psychological
factors that influence financial decision making.
The approach described also includes a simple diagnostic tool, as recommended in the previous
chapter. This tool takes the form of a quick quiz that helps pupils to identify their own consumption type.
Some important conclusions can be drawn from this chapter:
•
Behavioural economics and economic psychology can help to explain the shortcomings of
traditional approaches to financial education, but more importantly, they can be employed in the
design of more effective programmes
•
Product design and product delivery can also be improved by applying the lessons of behavioural
economics.
•
Behavioural economics assumes that people will respond to certain situations or incentives in
predictable ways. It is important that policies that draw on the lessons from behavioural
economics do not disadvantage individuals or groups of people who do not behave in the ways
predicted.
•
Behavioural economics has not provided us with a clear understanding of the link between
knowledge and behaviour, but it does help to explain why knowledge in itself may not be enough
to change behaviour.
•
Mechanisms that draw on behavioural economics to change behaviour are not universally
welcomed. In some countries policy makers prefer to encourage responsible financial behaviours
through highly personalised approaches rather than approaches that provide just one solution to
everyone.
The final part of this book focuses on the role of financial education in supporting consumer decision
making in a particular sector: defined contribution (DC) pension schemes. The shift to DC pensions has
implied a transfer of financial and management risks onto individuals, requiring them to be knowledgeable
about financial matters. However, evidence suggests that even basic numeracy is poor amongst a sizeable
proportion of working adults and pension issues actually involve particularly complex concepts (including
IMPROVING FINANCIAL EDUCATION EFFICIENCY: OECD-BANK OF ITALY SYMPOSIUM ON FINANCIAL LITERACY © OECD 2011
9
EXECUTIVE SUMMARY
inflation, investment and longevity risks, taxation) which most individuals are very unlikely to be familiar
with. Furthermore there is evidence to suggest that many people do not plan for retirement and do not
understand the pensions they hold.
Chapter 5, written by Professor Anna Maria Lusardi, and Chapter 6, written by Ambrogio Rinaldi
(Pension Funds Supervision Commission) consider the impact of the shift to DC pensions and evidence
indicating the need for financial education, information and guidance; they also assess and highlight
various policy options to address these issues based on available research (Chapter 5) and on the case of
the Italian supplementary pension system (Chapter 6). Chapter 5 notes that the use of default options can
substantially increase the take-up of pensions, but such options do not in themselves make people more
financially literate, and may even put some people at a disadvantage. It is therefore argued that financial
education should be seen as a complement to automatic pension enrolment in workplaces, since a degree of
individualisation is necessary to ensure a well-rounded financial plan that takes into account existing credit
commitments as well as wealth accumulation and it is more likely that this will be achieved if consumers
are well informed.
We can conclude from this chapter that as long as retirement planning and pension decisions are left
to individuals to organise, there will be an urgent and unabated need to provide high quality financial
education that enables individuals to assess their own circumstances, make informed financial choices and
identify the retirement plan that is right for them. The alternative approach of nudging people to choose
the right option through default mechanisms will not provide the perfect solution, since it leaves them no
wiser, and is not tailored to individual circumstances. Continuing financial education will also be vital as
the system evolves.
In the final chapter Ambrogio Rinaldi focuses on the case of the supplementary pensions landscape in
Italy in the last 20 years. The main transition started in 1995 with a shift from Defined Benefit to DC
pensions. Subsequently, the decision was taken to move to nationwide auto-enrolment, and it is the
introduction of this initiative that is the primary focus of the paper.
The auto-enrolment initiative was not as successful as anticipated, although its role does appear to be
increasing markedly through time. In 2009 it accounted for 38% of new adhesions to private pensions,
from just 5% in 2007.
The key conclusion from this final chapter is that auto-enrolment needs to be appropriately
implemented and supported by adequate financial education initiatives. In theory it can harness people’s
natural psychological tendencies for their own benefit, but in practice, there are many hurdles to overcome,
including the need for a consistent, comprehensive strategy that exploits the complementarities of each
instrument in use.
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Part I
Monitoring Financial Literacy
and Evaluating Financial Education Programmes
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I. 1. A FRAMEWORK FOR DEVELOPING INTERNATIONAL FINANCIAL LITERACY SURVEYS
Chapter 1
A Framework for Developing International
Financial Literacy Surveys
by
Elaine Kempson*
This chapter summarises the approaches taken to measuring financial literacy at the national
level, and makes recommendations for developing a survey instrument that could capture financial
literacy across a range of countries. It also describes the questions most frequently used to capture
financial literacy, and identifies those which might be used in an international survey. It goes on to
discuss the most appropriate survey method and briefly discusses possible ways of analysing the
resulting data.
*
Director/Professor, Personal Finance Research Centre, University of Bristol, UK.
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1. Introduction
There is growing concern, across a wide range of countries, about the levels of financial
capability of consumers. A large number of initiatives are therefore being developed to address this
issue; and countries are increasingly rolling out national strategies on financial capability. To do this
effectively requires evidence on the areas where financial capability in the population is low and an
identification of the extent to which these should be addressed by financial education and/or consumer
protection measures. Yet there is remarkably little robust information in this area and none that is
comparable across countries.
This chapter is based on a detailed investigation of 19 national and two international surveys of
financial literacy, along with the author’s own experience of designing and commissioning surveys
over the past 20 years. It comprises a checklist of things to be considered when designing and
commissioning a survey of financial literacy or capability, along with an indication of best practice.
It is aimed at policy makers who want to commission a survey of financial literacy or capability,
but who have limited or no experience of survey design. It will not enable the reader to become a
survey expert, but is intended to provide sufficient information for an informed discussion with
experts in sampling and survey and questionnaire design to ensure that the survey commissioned fully
meets the needs of the organisation commissioning it.
This Chapter
The chapter begins, section II, with a consideration of who is to be surveyed and who will not. It
then considers, in section III, the range of survey methods that can be used, drawing out their
advantages and disadvantages before discussing, in section IV, various aspects of sampling. Section V
considers survey content and questionnaire design, while section VI covers survey administration. The
final substantive chapter, section VII, discusses the analysis and reporting of the results.
2. Who to survey
It is important, at the outset, to decide who the survey will cover and, just as importantly, who
will be excluded as this will determine the survey design and content. It will need to be included in the
brief given to the organisation that will be undertaking the survey. In this context, it should be noted
that these guidelines are designed primarily for surveys with adult populations.
1. Individuals or households?
One of the first things that will need to be decided is whether the survey will assess levels of
financial literacy or capability of individuals, of households collectively, or of the most knowledgeable
person in a household. The most common approach, by far, is a survey of individuals and this is the
approach that is recommended. Households are, in many cases, not stable over time, as people form
and dissolve relationships. At the same, it is important to recognise that individuals operate within a
household context and that behavioural outcomes may be influenced by the financial capability of
others. For this reason it is important that a survey which goes beyond measuring knowledge alone
should ascertain the role played by the individual in all the areas of decision making that are covered.
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2. Deciding who is to be included
Secondly, upper and lower age limits need to be set for inclusion in the survey. The most
common approach is to cover all adults aged 18 and over, with no upper age limit. This is the
approach we would recommend. In most developed economies, 18 is the age when most individuals
begin to adopt some autonomy with regard to their finances and become legally permitted to use the
various sources of credit, including current accounts that can be overdrawn. Some surveys set an upper
age because some very elderly people have difficulty taking part in a survey and, indeed, others may
manage their finances for them. If no age limit is set, it will be important to screen out people who do
not manage their own financial affairs due to mental impairment. This can apply to some younger
people too.
To ensure that data collected is comparable with other countries, it is important to collect the
exact age of survey participants, as opposed to collecting it in age bands. This allows greater flexibility
when analysing the results and enables cross country comparisons to be drawn even when the age
limits differ.
It is common practice to exclude from national surveys people who are living in residential
institutions, such as care homes, hospitals, prisons, and homeless people’s hostels. This is done for a
number of practical reasons. Many of those living in such institutions are not able to undertake a
survey and, in any case, few will have independent control of their finances. In addition to this, it will
be necessary to negotiate access through thirds parties, including the manager of the institution and
close relatives. Countries wanting to develop a survey should consider following general practice and
exclude such groups from the survey unless there are compelling reasons to include them. Any
excluded groups should be recorded.
It is also common for face-to-face surveys to exclude people living in extremely sparsely
populated areas, as it is too costly to include them in the survey. This problem is, however, overcome
by the use of a telephone survey; but this, too, can create biases especially where there is not universal
access to a telephone, as we discuss in section III. If it is decided to use a face-to-face survey, it will be
important to discuss with the survey firm that undertakes the fieldwork what restrictions, if any, they
place on the population that will be covered. Likewise consideration will need to be given in a
telephone-based survey to coverage of people who lack a telephone (or who only have a mobile one).
Any restrictions in the population surveyed need to be recorded.
Most countries have some minority ethnic groups which may mean that a range of languages are
spoken across the population. It is, therefore, important to consider whether provision needs to be
made for the survey to be carried out in minority languages where needed, bearing in mind that some
ethnic groups may be bilingual and, therefore able to undertake the survey in the majority language.
Because the costs of doing so can be high, this is usually decided by setting a lower limit for the size
of a particular linguistic group that will have the survey administered in their mother tongue. Again,
this needs to be recorded.
3. Summary of proposed best practice guidelines
Based on best practice, it is proposed that:
•
National surveys should be of individuals rather than households.
•
The lower age limit for respondents should be set at 18 but there should be no upper age
limit. All surveys should collect the exact age of respondents.
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If any groups will be excluded (or are likely to be excluded) from the survey for practical or cost
reasons this should be recorded. This might include people: who live in institutions or who do not
manage their own finances through mental incapacity; who live in very sparsely populated areas or
lack a telephone, or who cannot speak the language of the majority of the population.
3. Survey method
Having decided who to include in the survey, the next area for careful consideration is the
preferred survey method. Existing surveys have used a range of methods including: personal
interviews which are either face-to-face or by telephone and self completion surveys which are either
paper-based or use the web. Each method has its advantages and disadvantages and the cost varies
quite considerably. For this reason we discuss the options in turn. It should, however, be noted that
there is (technical) methodological work showing that the survey method influences the replies given
to apparently identical questions.
1. Personal interview surveys
Personal interview surveys are most commonly used (12 of the 18 surveys) and especially so for
broader-based surveys covering behaviour and attitudes as well as knowledge. Only one of such
surveys (The Dutch CentiQ) was not based on personal interviews.
Personal interviews have a number of advantages over self-completion surveys for a survey of
financial literacy or capability. The most obvious of these is that they do not require respondents to
have a basic level of literacy and accommodate people with impaired sight. The other main advantage
is that they can be longer and include more un-prompted questions, that is questions where
respondents can answer in their own words (with the interviewer coding the reply) rather than
choosing from a list of pre-determined options. Linked to this, the interviewer can probe to get a full
reply. It is also possible for interviewers to provide an indication of any respondents who appeared not
to be answering the questions frankly.
Moreover, they can be more complex in their questionnaire design, with questioning tailored to
individual circumstances, while paper-based self-completion questionnaires work best if they are
designed so that everyone answers all of the questions. If there is complex routing through a selfcompletion questionnaire, the respondent can get lost and answer the wrong questions. Web-based
surveys do not suffer the same disadvantage.
The quality of the data collected by personal interviews depends on the skill of the interviewer.
Poor interviewers deliver low response rates, incomplete interviews (with sensitive questions
unanswered) and can influence the responses given by respondents. For this reason it is important that
the interviews are undertaken by an organisation that has interviewers who are skilled and experienced
in social surveys (as opposed to market research).
Face-to-face interviews
Five of the 18 national surveys for which full survey details were available used face-to-face
interviews. The advantage of this approach is, firstly, that the interviews can be longer – up to an hour
is generally considered acceptable. Secondly, response rates (both overall, and for individual
questions) tend to be a good deal higher than for other methods. It is also possible to build in selfcompletion of some questions that might otherwise be too sensitive for people to answer.
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In addition, national sampling frames (records from which samples of people are selected for
surveys) tend to be better for addresses than they are for telephone numbers.
Face-to-face interviews do, however, have two main disadvantages, relating to cost and
representativeness of the sample. There is no doubt that face-to-face surveys are the most expensive of
survey methods (often twice the cost of telephone ones). Moreover, for practical reasons the sample
needs to be clustered to some degree – in other words a sample of locations is selected for the survey
rather than the sample being spread across the entire population. Face-to-face surveys are also difficult
and very costly in sparsely populated areas and, as a consequence, such locations are generally
excluded. The use of entry-phones, especially where there are gated communities, can restrict access
to some sections of the population and affect the representativeness of the sample.
Despite these reservations face-to-face interviews are considered the “gold standard” in many
(but by no means all) countries.
Telephone surveys
Seven of the 18 national surveys for which full survey details were available used telephone
interviews. In general, telephone interviews tend to be preferred in countries with a low population
density in order to cover the whole country, rather than just the cities and other densely populated
areas. They do not require the sample to be clustered. They are also a good deal cheaper than face-toface surveys.
They do, however, place limitations both on the length of interview that can be conducted – half
an hour is often considered the maximum length – and on the types of question that can be asked.
Face-to-face interviews often rely on showing individuals cards with a range of possible responses. On
the telephone these have to be read out which both increases the length of time a question takes and
limits the list of possible replies. It also limits the use of questions where respondents are asked to
react to or use written information – a common example is extracting information from a sample bank
statement. Furthermore, it is not possible for interviewers to verify information by checking
paperwork or help respondents with written prompts. Telephone surveys can also be problematic for
people who have hearing problems or who are not being interviewed in their first language. People
with hearing difficulties often rely on facial expression and a degree of lip reading; while
communication difficulties between people with differing first languages can be exacerbated on the
telephone.
Telephone-based surveys may also have a risk of biased sampling, depending on the penetration
of telephones and whether the records used for sampling purposes cover cell phones as well as land
lines. This is discussed further in section IV.2.
2. Self-completion surveys
The main advantage of self-completion surveys is their cost as they are a good deal cheaper than
personal interview surveys. It can be argued that people may be more likely to give an honest reply to
sensitive question in an anonymous self-completion survey. On the other hand, it is also possible to
avoid being completely honest and/or to give replies that are deliberately wrong. Whereas this can be
noted by an interviewer and a decision taken about whether to exclude the information collected from
the survey data, this is not possible with self-completion surveys.
Moreover, it is not possible to probe replies in the ways possible in personal interviews – as noted
above.
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As noted above as well, people with literacy problems or who are not literate in the language of
the survey, will be excluded from the survey and generally, the number of people affected in this way
is not known. As seriously, there will be some people with literacy difficulties who attempt to
complete the survey and misunderstand the questions. Self-completion surveys are also problematic
for people with impaired sight.
The other main disadvantage is that response rates tend to be a great deal lower than in personal
interview surveys and this introduces bias into the data which it may not be possible to correct. Web
surveys that are embedded within a website have particularly low response rates – often in single
figures – and samples generated in this way cannot reasonably be considered representative of the
population.
Paper-based Surveys
Three of the 17 surveys for which full survey details were available were self- completion using a
paper-based questionnaire. Two of the three were surveys of knowledge rather than broad-ranging
surveys.
Paper-based self-completion questionnaires generally need to be very short, contain simple
questions and be very simple in their design. This is in contrast to personal interview or web-based
questionnaires which can include more complex questions and be tailored to the circumstances of
individuals by skipping irrelevant questions.
Web-based Surveys
Three of the 17 surveys for which full survey details were available were web-based. Two of the
three were surveys of knowledge rather than broad-ranging surveys.
Web-based self-completion questionnaires do not need to be as simple as paper-based ones as
they can be programmed to take the respondent to the questions that are appropriate for them, based on
replies they have already given. There is also some evidence from the Dutch CentiQ survey that, under
some circumstances they may not suffer from the same length constraints.
The suitability of a web-based survey depends on the proportion of the population that has access to
the Internet and the risk of having a biased sample. It is for this reason that we cannot recommend it as a
general approach to collecting data, although it should be noted that the Dutch DNB survey recruits
respondents by telephone and provides internet access to recruits who lack it. This is, however, costly as
it involves both providing the equipment and training to survey respondents. This cost was justified for
the DNB survey as it is a panel survey, with the same people interviewed each year.
3. Using an existing survey
An option that is worth considering is to add questions to an existing survey, rather than
commission a stand-alone survey. Here there are two possibilities. Many countries have existing
national surveys that ask about household finances, often interviewing all individuals within a
household. These tend to be annual. The other option is to use what is known as an “omnibus survey”.
These are surveys that are run regularly (often monthly) and routinely collect personal and economic
details of respondents (for example, age, gender, employment). The remaining questions are
commissioned by other organisations so that the content of the survey varies greatly from one month
to the next and in any one month will cover a diverse range of subjects, depending on who has
commissioned additional questions.
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There are real advantages to using an existing survey – provided they are run by a reputable body
and are robust in their sampling and design. They are a very cost effective way of collecting data as
the fixed costs of the survey are shared with others. And some of the information needed will already
be included in the survey although this will vary and should be investigated in detail as it will affect
the cost of your own module of questions. Moreover, it is possible to judge in advance how robust the
data provided will be.
On the other hand, there will be a limit on the number of questions that can be included, and this
will vary from survey to survey. And it is important to note that the other questions asked in the survey
can have an influence on the replies to the ones commissioned.
4. Summary of proposed best practice guidelines
Countries planning a national survey should consider collecting the data using a personal
interview survey, rather than a self-completion one. Whether the interviews should be by telephone or
face-to-face will, however, need to be decided locally, bearing in mind the points raised above. It
should, however, be remembered that data collected in these two ways is not strictly comparable.
Likewise whether a stand-alone survey is commissioned or questions added to an existing survey
will need to be decided locally. Although it should be borne in mind that replies can be influenced by
the other questions included on the existing survey. Existing surveys should only be considered where
they are run by a reputable body, are robust in their sampling and design and are surveys of
individuals rather than households.
4. Sampling
Sampling is a complex area and one where the help of a statistician will be needed. This section
therefore sets out best practice from existing surveys to inform discussions with these experts. It
covers both sample size and design and provides an overview of the different methods of sampling,
including their advantages and disadvantages. This section refers only to personal interview surveys as
that is our recommended approach.
1. Sample size and sample design
A statistician advising on the sample size and design will need to consider the population size and
its heterogeneity as well as how you will want to analyse the data.
There are, therefore, a number of things that you will need to consider. First, how much detail do
you want in your analysis? When producing tables of, for example, how people in different age groups
reply to individual questions, you will need 100 people in each age group to meet normally accepted
statistical standards, although samples of between 50 and 100 can be quoted with warnings about the
small sample size. Samples of less than 50 people should never be reported. It is, therefore, important
to design the sample size and design with this in mind, telling the statistician exactly how you propose
to analyse the data.
Secondly, you need to decide what level of precision you require in the data. In general, the larger
the sample size the greater the precision. But it will also depend on the likely distribution of replies to
a question. So it is worth investigating the replies to key questions in other surveys to help with these
deliberations.
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Thirdly, you need to consider whether you want to carry out separate analysis of particular groups
in the population. Two examples include separate analysis of data for particular ethnic groups; or of
particular geographical or administrative units (e.g. states in Australia, countries in the UK, provinces
in Canada). There are two ways of doing this. The first is to increase the overall sample size, as was
done in the Statistics Canada survey. But because very large samples are expensive, the approach
more commonly adopted is to over-sample the groups of interest – often known as “booster samples”
– to ensure that there are sufficient numbers of people within certain categories to be able to undertake
meaningful analysis. The Australia, Netherlands (CentiQ), New Zealand and UK surveys had booster
samples of people from specific minority ethnic groups. The UK survey also had booster samples in
Scotland, Wales and Northern Ireland to permit detailed analysis within the four countries of the UK.
These booster samples have to be weighted back to the population averages for analysis of the whole
sample, in order to prevent them having undue influence on the findings, but they can also be analysed
separately. A statistician can advise on how this should be done.
2. Sampling method
There are various ways of selecting a sample for a survey but these come down to two main ways: a
random sample and a quota sample, each of which is described below. There is a third possibility –
namely self-selection, which is sometimes used in self-completion surveys. This should be avoided as
it provides a very biased sample.
Random Samples
Random (sometimes known as probability or pre-selected) samples are ones where each
individual has an equal chance of being selected for the survey and a pre-identified individuals are
identified for interviewers to contact. This approach was used by five of the 11 stand-alone surveys
where sampling details were provided and most obtained response rates of between 60 and 65 %.
Random samples produce the most representative samples and are generally to be recommended.
But they do require an accurate, comprehensive and up-to-date list (or sampling frame) of the
population to be surveyed. Ideally, this should be of all individuals in the population or, failing that, of
addresses/telephone numbers. In the latter case, however, it is important to select one person at
random within the household (not the person who opens the door or answers the telephone) and to
ensure that smaller households are not oversampled. A statistician can advise on both these points.
The availability of suitable sampling frames may determine the survey method used. A face-toface survey requires a list of individuals with their addresses or, failing this, a list of addresses within
which an individual is selected for interview. Telephones, however, can pose a problem where there
are separate listings for land lines and cell phones or, worse still, no listing at all for cell phones. The
first would lead to over-sampling people who have both a landline and a cell phone; the latter would
lead to the exclusion of people with only a cell phone from the survey. Some countries have facilities
whereby telephone subscribers can opt not to have their telephone listed in directories and/or register
their wish not to receive unsolicited telephone calls. Both can introduce bias into a telephone sample.
Quota Samples
Six of the eleven surveys used quota sampling – where a sample of survey locations is selected
(face-to-face surveys) or random digit dialling is used (telephone surveys) and interviewers are given
instructions on the numbers of particular types of people to be interviewed (specifying age, gender and
sometimes other characteristics) and are then left to identify people who are willing to take part in the
survey. In such cases, therefore, no response rate can be quoted. Quota sampling runs a high risk of
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biases in the sample, depending on the number of characteristics on which the quota is operated. If it is
only based on age and gender, for example, there is a real risk that people who are at home during the
day are over-sampled. For this reason interviewers sometimes receive instructions that a certain
proportion of the fieldwork should take place in the evening or at weekends. Including economic
activity status in the quota would also ensure that people who work full time are not excluded from the
survey.
Three of these surveys used a method known as random location quota sampling, which is a
sophisticated form of quota sampling for face-to-face surveys that avoids most of the biases of the
simple quota methods by minimising interviewer discretion about where and who to interview. In
general, such surveys involve selecting at random a large number of tightly defined locations, each of
which has a relatively small population (a particular post code for example). Interviewers are then left
to identify a fixed and small number of people to approach for an interview within a tightly defined
quota. It would also be common for them to have to carry out a certain proportion of the fieldwork in
the evening or at weekends. Where response rates to random sample surveys are falling, such random
location samples are often considered to provide as robust a sample.
In general, the more characteristics that are included in a quota the more representative the final
sample will be; but at the same time, the costs of sampling will increase. It is also important to ensure
that the characteristics include ones that are pertinent to the survey. In the area of financial literacy or
capability, past surveys suggest that this would include age, gender, education level and degree of
engagement with financial services. The US FINRA telephone survey used random digit dialling
operated quotas on age, gender, income, ethnicity, education level, and region. The UK face-to-face
baseline survey of financial capability used random location sample, selecting locations with
probability proportional to size from a listing of small areas (300 households on average) across the
country, stratified by region and neighbourhood type1. Quotas were operated within these areas on age
and gender within working status.
3. Summary of proposed best practice guidelines
The advice of a statistician should be sought on sample size and design.
In general, a random sample is to be preferred although, where response rates to such surveys are
low within a country, consideration might also be given to random location sampling for face-to-face
surveys and random digit dialling for telephone ones. In both cases, detailed quotas are required to
ensure a representative sample.
5. Questionnaire design
The review of surveys identified a wide diversity both in their coverage and in the nature of the
questions that were asked. The broad-ranging surveys covered four conceptually different areas: dayto-day money management; financial planning; choosing appropriate products and financial
knowledge and understanding.
Consideration should be given to covering all four areas in a national survey and to the
questionnaire designed by drawing on the questions used in previous surveys. There was extensive
development and testing work undertaken to inform the design of national financial literacy surveys
worldwide (United Kingdom (FSA baseline survey), Statistics Canada, Ireland, and Netherlands
CentiQ). Result of this work can be particularly useful.
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We have also investigated in some detail the questions used in previous surveys to identify core
ones that would permit the collection of internationally comparable data. These questions were
selected using five criteria:
1.
questions that meet best practice for question design generally (including drawing on the
cognitive testing undertaken for the Statistics Canada, Irish and UK surveys);
2.
questions that can be “scored”, with replies ranked from most to least capable;
3.
ones that are common to a number of surveys and are equally relevant across a range of
countries;
4.
questions that are equally applicable across all sections of the population;
5.
questions which are correlated strongly with the concept being measured.
Some areas were identified where internationally comparable data could not be collected but
questions should never-the-less be included in a national survey.
1. Day-to-day money management
This covers three areas: financial control; making ends meet and general approaches to financial
management
In this area we have identified nine core questions that could potentially be included, although
this is probably too many and, following discussion, the number should be reduced. They are:
Financial control
•
Whether people have a budget.
•
Whether and how people keep records of their spending.
•
How accurately people know how much money they have available for daily living costs.
Making ends meet
•
How often run short of money and a linked question on actions taken when money runs out.
•
How easy it is to keep up with payments on bills and other financial commitments.
Attitude questions on approaches to financial management
22
•
I am impulsive and buy things even when I can’t really afford them.
•
I buy things on credit rather than waiting and saving up.
•
I am organised with regard to managing money.
•
I am more of a saver than a spender.
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2. Financial planning
This covers provision for an emergency or “rainy day”; savings/insurance held; financial provision for
retirement; financial provision for anticipated expenses such as health care, education or a known
event. We have identified four potential core questions in the first two areas, plus a further three
attitude questions.
Provision for an emergency
•
How would meet daily living costs if lost the main wage (or had a substantial drop in income
if no income from employment) for three months.
•
How would meet an unexpected expense of a set multiple of monthly income.
Savings/insurance held
•
How much money is put aside in savings for an emergency.
•
Types of insurance held.
These questions need to be considered together as it is a matter of choice whether to have savings
or insurance cover and they need to be used to judge the adequacy of provision people say they have
made in the previous two questions.
Provision made for retirement
This is an important area and most surveys will want to include questions to assess the adequacy of
the financial provision individuals have made for their retirement (the exception being where individuals
receive adequate assistance from a state pension so that private provision is far less important). However,
the nature of pensions provision, and therefore, how one would judge its adequacy for an individual,
varies so much between countries that it is not possible to identify a core of questions that meet our
criterion of having been used in a number of previous surveys and are equally relevant across all
countries. It is, however, possible to identify core attitude questions (see below).
Financial Planning for anticipated expenses
This is a topic that varies in importance across countries. Those where all individuals have to
make their own financial provision to meet major expenses such as education or health care will want
to include questions to assess the adequacy of the provision they have made for future costs. In other
countries, such expenses are met out of general taxation. For this reason, it has not been possible to
identify core questions in this area. Again, though, it is possible to identify core attitude questions (see
below).
Attitudes to financial planning
These are included to identify poor people who would plan for future financial needs if they
could and rich ones who only do so because they have a surfeit of money. Proposed questions include:
•
I live for today and let tomorrow take care of itself.
•
I find it more satisfying to spend money than save it for the long term.
•
I save money for a rainy day.
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3. Choosing appropriate products
The ability to choose appropriate products is an important area to cover as most national surveys
show that capabilities are low. It is, however, potentially a difficult area in which to assess behaviour
because previous surveys have found that a significant minority of people have not personally made a
decision about which product to buy within a relatively recent past. This means that they cannot be
asked about their actual behaviour and their replies to more generic questions about how they choose
products would be meaningless. There is no easy solution to this dilemma. In general, it is better to ask
people about actual behaviour and note that some people have no score for this domain.
With this in mind we have identified two possible core questions covering:
•
Whether people shop around before buying financial products.
•
What product features were considered when making a recent purchase (ideally the most
complex product they have bought).
Other areas considered included:
•
whether people read the terms and conditions of products bought – which might be
considered for inclusion, although most people over-state the extent to which they read them
and, consequently, replies can be unreliable. It may be most appropriate to include a question
of this type in countries where legislation requires financial services providers to include
summary (or Schumer) boxes that draw out the key features of a financial product in the
information consumers receive before they are asked to sign a contract;
•
whether people review current holdings of investment, insurance, or pension cover. This is
not recommended for the core of questions as it does not apply to everyone in the population
– only those who have these products.
4. Financial knowledge and understanding
Although this topic is covered widely in surveys, the questions asked vary widely and many do
not meet our criteria set out above.
Many surveys ask how people keep up to date with financial matters, including:
•
what they monitor and how often, and
•
the information sources they use.
Both could be considered for inclusion in the core questions.
In addition, there is a range of questions designed to measure respondents’ knowledge and
understanding. The three selected as possible core questions include ones that assess:
24
•
ability to weigh up risk and return
•
understanding of inflation
•
understanding of interest rates
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Although the second and third of these measure mathematical ability as well as understanding of
these concepts.
Two further possible core questions are:
•
knowledge of key features of products held - although replies cannot be independently
verified for their accuracy. Existing surveys code a “don’t know” reply as indicating a low
level of financial literacy/capability; and
•
an attitude statement “I know enough about financial products to choose ones that meet my
needs”.
Other areas considered, but recommended as optional rather than core questions were:
•
Knowledge of financial products generally, as this depends to a very large extent on people’s
level of engagement with financial services. The types of products available also differ
between countries making it difficult to design a core question. It is, however, a useful
explanatory variable.
•
Knowledge of consumer rights – an important area, but as rights vary widely between
countries it is not possible to design a generic question.
•
Getting redress – which is a difficult area to cover. Knowing where to complain is not the
same thing as being prepared to do so when the need arises. In existing surveys too few
people claimed to have had a problem where they needed to seek redress to ask about actual
behaviour.
5. Explanatory variables
In addition, to these core questions to measure financial literacy/capability the questionnaire will
need to include a range of what are known as “explanatory variables” these include: age, gender,
family circumstances, work status, income (and possibly income stability), educational level and
region of the country, as well as questions that capture appetite for risk, time horizons and the extent
of engagement with financial services.
6. Analysing and reporting the results
Having collected the data, consideration then needs to be given to analysing and reporting the
results. Past surveys have adopted three broad approaches, but with wide variation in the extent to
which these are covered. They include: reporting aggregate replies to individual questions; developing
a score; and segmenting the population.
1. Replies to individual questions
The first and most straightforward approach to reporting the survey results is to create frequency
tables. Here, the reporting focuses on the overall proportions of people answering particular questions
in certain ways (such as the percentage agreeing with a particular statement). This approach can be
used to report findings from all questions that are included in the survey and provides easily
understood, headline figures.
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Most surveys, however, go further and report the frequencies by socio-demographic and other
variables such the ones proposed in section V.5. This is known as cross tabulations and provides an
additional level of detail, and is useful for policy makers looking to identify groups of people most in
need of financial capability interventions in very specific areas. It is, therefore, recommended.
2. Developing a score
Individual questions do not, however, give an overview of capabilities. For this, some form of
scoring is required, collating the replies from some or all of the questions. It is particularly important
whether the number of questions in a survey is large, in which case the need to summarise is very
apparent, or is based on the core of questions suggested in section V, when individual questions have
been selected as measuring an indicative behaviour.
Simple arithmetic scores are appropriate for knowledge-based surveys that include questions with
replies that are either correct or not. They are not, however, recommended for broad ranging surveys
covering behaviour and attitudes as well and where questions have differing levels of importance in a
score and may be measuring very different capabilities. For example, a question on whether or not
someone is not able to pay all their bills and other financial commitments might be considered of
greater importance than one assessing the ability to calculate the impact of inflation on savings. And
they are certainly measuring different types of capability.
There are statistical methods that can be employed to help with these problems and the report on
the UK baseline survey rehearses the advantages and disadvantages of these for a broad-ranging
survey of financial literacy (Atkinson et al, 2006). The most widely-used method, both for surveys of
financial capability surveys and more generally for surveys to measure, for example, levels of
deprivation or health, is known as “factor analysis”. For this reason it is the approach we recommend
that countries consider, particularly where the number of questions in a survey is large. You will need
the help of a statistician or survey analyst with this.
Factor analysis identifies questions that are correlated and therefore measure some underlying
concept, or factor, and enables the analyst to create one or more new variables that can be used to
reflect the much larger number of original variables entered into the analysis. The analysis still
requires an element of subject expertise in order to explain and name the underlying concept that is
identified through the correlations.
There are particular data requirements for using factor analysis – it cannot be used with
“nominal” variables (variables with responses that cannot be ordered). As is the case when creating an
arithmetic score, it is important to know which responses indicate the “right” answer. Questions
clearly need to be designed with this in mind.
Factor analysis can also be used to create a score based on the replies to the questions it contains.
A facet of this technique is that it will identify broad areas of capability that are distinct from one
another. If this turns out to be the case, however, it will not be possible to calculate a single
meaningful score combining all questions. Instead it would be used to calculate separate scores for
particular areas of capability. Analysis of this kind on the survey data in Ireland and the UK shows
that the five main (and distinct) capabilities are: financial control; making ends meet; financial
planning; choosing financial products and financial knowledge and understanding.
It is recommended that, if data can be collected on a set of core questions across a number of
countries, further development work is undertaken on how best to score the replies.
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3. Population Segmentation
The third approach to analysis and reporting makes use of some kind of segmentation approach.
Analysts seek to describe sub-groups of people with similar financial literacy or capability and the
results can be used as a tool for identifying groups that should be targeted by initiatives to raise levels
of financial capability. There are several methods that can be used to segment the population.
The simplest is to rank people according to their scores, and then put them into a number of equal
sized groups. More commonly segmentation is undertaken using a more complex statistical technique
known as cluster analysis. Described simply, cluster analysis identifies people who are most similar in
terms of their responses to the specific questions included in the analysis, and separates them from
others who do not share these similarities. It can also be used to segment people by their “factor
scores” in different areas of financial capability.
It should be noted that the final decision about how many clusters to create is decided by the
analyst (informed by the statistics), although it is also dependent on the data used to create the clusters.
It will, therefore, inevitably vary across surveys. So while it will be very useful for national policy
makers, who want to know which groups to target with initiatives intended to raise capability in
particular areas, it is less likely to be useful for international comparisons.
It is, however, a form of analysis that has many advantages. Like score development, it will
require the assistance of a statistician or survey analyst who is familiar with the statistical techniques.
4. Summary of proposed best practice guidelines
Survey data should be analysed and reported using cross tabulations.
In surveys with a relatively large number of questions, scores should be calculated using factor
analysis. Further exploratory analysis needs to be undertaken to undertaken develop a method of
scoring data collected across a range of countries using a set of core questions.
Segmentation of the population, either by ranking people by their scores or using cluster analysis,
also has a good deal to commend it.
The assistance of a statistician or survey analyst will be required for factor and cluster analysis.
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ANNEX I. A1 - WEB LINKS TO SURVEY REPORTS AND QUESTIONNAIRES
Country
Organisation
Hyperlinks
Broad ranging Surveys
Australia
ANZ Bank
http://www.anz.com/Documents/AU/Aboutanz/AN_5654_Adult_Fin_Lit_Re
port_08_Web_Report_full.pdf
Austria
Oesterreichishe
Nationalbank
http://oenb.at/en/presse_pub/period_pub/volkswirtschaft/geldpolitik/monet
ary_policy_and_the_economy_07q3.jsp
Canada
Statistics Canada
and Human
Resources and
Skills Development
Canada
http://www.statcan.gc.ca/cgibin/imdb/p2SV.pl?Function=getSurvey&SDDS=5159&lang=en&db=imdb&
adm=8&dis=2
Iceland
Ministry of Business
Affairs & Icelandic
Investor/
Shareholder
Association
http://www.fe.is/index_files/Page524.htm
Ireland
Financial Regulator
http://www.financialregulator.ie/publications/Pages/statisticsresearch.aspx
Indonesia
Bank of Indonesia
Not available yet
Italy
PattiChiari
Consortium and
The European
House Ambrosetti
http://www.ambrosetti.eu/_modules/download/download/it/documenti/ricer
ca/112008_ExSum_PattiChiari_ITA.pdf
Malaysia
Bank Negara
Malaysia
Not available yet
Netherlands
CentiQ
http://www.wijzeringeldzaken.nl/centiq_sites/objects/8ff2caf24ddbe403704
4eaf6008bb788/summary_financial_insight_amoung_the_dutch.pdf
http://www.wijzeringeldzaken.nl/centiq_nl/publicaties.php
Singapore
Money Sense
Financial Education
Steering Committee
http://www.mas.gov.sg/resource/news_room/press_releases/2005/Financi
al%20Literacy%20Levels%20in%20Singapore,%20Full%20Report.pdf
UK
Financial Services
Authority
http://www.pfrc.bris.ac.uk/publications/Reports/Fincap_baseline_question
naire_06.pdf
http://www.pfrc.bris.ac.uk/publications/Reports/Fincap_baseline_results_0
6.pdf
http://www.pfrc.bris.ac.uk/publications/Reports/Fincap_baseline_BMRB_0
6.pdf
http://www.pfrc.bris.ac.uk/publications/completed_research/Reports/Finca
p_June05.pdf
USA
FINRA
http://www.finrafoundation.org/resources/research/p120478
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Country
Organisation
Hyperlinks
Surveys of Knowledge
France
Autorité des
Marches Financiers
Not available
Italy
Banca d’Italia
http://www.bancaditalia.it/statistiche/indcamp/bilfait/boll_stat/suppl_07_08.
pdf
Japan
Bank of Japan and
CCFSI
http://www.shiruporuto.jp/e/consumer/pdf/sisin02.pdf
Netherlands
De Nederlandsche
Bank
http://www.nber.org/papers/w13565
New
Zealand
Retirement
Commission
http://www.consumeraffairs.govt.nz/policylawresearch/Research/financialknowledge/report/report.pdf
USA
National Council on
Economic Education
http://207.124.141.218/WhatAmericansKnowAboutEconomics_0426053.pdf
USA
Jump$tart
http://www.jumpstart.org/fileindex.cfm
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ANNEX I. A2 - FINANCIAL LITERACY MEASUREMENT QUESTIONS AND
SOCIO-DEMOGRAPHICS, BY ADELE ATKINSON, OECD
I would like to start by asking you a few background questions, so that we can put the main part of the
survey into context.
ASK ALL
QD1) (Marital status) Please could you tell me your marital status?
a)
Married
b)
Single
c)
Separated/divorced
d)
Living with partner
e)
Widowed
f)
Don’t know
g)
Refused
QD2_a) (CHILD_a) How many children under the age of 18 live with you?
Record number --a)
Don’t know
b)
Refused
QD2_b) (ADULT_b) How many people aged 18 and over live with you, [including your partner]?
Please do not count yourself.
Record number --a)
Don’t know
b)
Refused
Now I am going to move on to ask about money matters. Please can you start by telling me:
ASK IF QD2_a greater than 0 or QD2_b is greater than 0.
QF1) (WHOMM) Who is responsible for day to day money management decisions in your
household?
INTERVIEWER: READ OUT a- f:
a)
b)
c)
d)
e)
f)
g)
h)
i)
30
You
You and your partner [do not read out if no partner at QD1]
You and another family member (or family members)
Your partner [do not read out if no partner at QD1]
Another family member or (or family members)
Someone else
Nobody
Don’t know
Refused
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ASK ALL
QF2) (BUDGET) Do you have a household budget?
(IF NECESSARY ADD: a budget is used to decide what share of your income will be used for
spending, saving and paying bills)
a)
b)
c)
d)
Yes
No
Don’t know
Refused
PRODUCT QUESTIONS IN TABLE BELOW:
Note to Authority/Agency: The list of product types will need to be specific to your country, and should
cover savings, investments, credit (unsecured and secured if relevant) and insurance products.
ROTATE LIST OF PRODUCTS
QC1_a)
(PRODHOLD)
Please can you
tell me whether
you have heard
of any of these
types of
financial
products.
1.
A pension fund
2.
An investment account,
such as a unit trust
A mortgage
A bank loan secured on
property
An unsecured bank loan
3.
4.
5.
ASK ALL
respondents
filtering products
on QC1_a=Yes
ASK ALL
respondents
filtering products
on QC1_a=Yes
QC1_b)
(PRODHOLD) and
now can you tell
me whether you
currently hold any
of these types of
products?
QC1_c) (PRODCH)
and In the last two
years, which of the
following types of
financial products
have you chosen
(whether or not you
still hold them)…IF
NECESSARY ADD:
Please do not
include products
that are renewed
automatically.
6.
A credit card
7.
A <current> account
8.
A savings account
9.
A microfinance loan
10. Insurance
11. Stocks and shares
12. Bonds
(Don’t know, refused)
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ASK ALL THOSE WHO ANSWERED YES AT any QC1_c excluding stocks, shares and bonds, if
asked) :
QC2) (CHPROD) Which of the following statements best describes how you last chose a [TAKE
THE FIRST PRODUCT LISTED FROM QC1_c]?
Note to Authority/ Survey agency: as the list of products will be rotated, the product that is
chosen for this question will depend on the order of questions. Do not ask this question about
stocks, shares or bonds
INTERVIEWER: READ OUT a-d
a)
b)
c)
d)
e)
f)
g)
I considered several [products/loans/policies/accounts] from different companies before making
my decision
I considered the various [products/loans/policies/accounts] from one company
I didn’t consider any other [products/loans/policies/accounts] at all
I looked around but there were no other [products/loans/policies/accounts] to consider
Don’t know
Not applicable
Refused
IF a-c AT QC2 ASK
QC3) (INFL) Which sources of information do you feel most influenced your decision about
which [TAKE THE FIRST PRODUCT LISTED FROM QC1_c) to take out?
Note to authority/agency: Please add in country specific options under each category.
Remember that the product under discussion will depend on the order of the products listed in
QC1_c.
INTERVIEWER: WAIT FOR RESPONSE. READ OUT LIST IF NECESSARY. CODEALL.
DO NOT READ OUT _1 Product-specific information
a)
Unsolicited information sent through the post
b)
Information picked up in a branch
c)
Information found on the internet
d)
Information from sales staff of firm providing the products (including quotes)
DO NOT READ OUT _2 Best buy guidance
e)
Best-buy tables in financial pages of newspapers/magazines
f)
Best-buy information found on the internet
g)
Specialist magazines/publications
h)
Recommendation from independent financial adviser or broker
DO NOT READ OUT _3 General advice
i)
Advice of friends/relatives (not working in the financial services industry)
j)
Advice of friends/relatives (who work in the financial services industry)
k)
Employer’s advice
DO NOT READ OUT _4 Media coverage
l)
Newspaper articles
m)
Television or radio programmes
DO NOT READ OUT _5 Adverts
n)
Newspaper adverts
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o)
p)
Television adverts
Other advertising
DO NOT READ OUT _6 Other
q)
Other source
r)
Don’t know
s)
Not applicable
t)
Refused
We are now going to talk about more general money matters. Remember that there are no particular
wrong or right answers; everyone has their own way of doing things.
ASK ALL (rotate questions)
QM1) (MEM_BEH) I am going to read out some behaviour statements. Please can you tell me
whether you do these things or not, using a scale of 1 to 5, where 1 is something you always
do and 5 is something you never do:
INTERVIEWER: READ OUT EACH STATEMENT AND WAIT FOR RESPONSE
a)
Before I buy something I carefully consider whether I can afford it
always, 2, 3, 4, never (Don’t know, refused)
b)
I pay my bills on time
always, 2, 3, 4, never (Not relevant, don’t know, refused)
c)
I keep a close personal watch on my financial affairs
always, 2, 3, 4, never (Don’t know, refused)
d)
I set long term financial goals and strive to achieve them
always, 2, 3, 4, never (Don’t know, refused)
ASK ALL
QM2) (MEM_NO) Sometimes people find that their income does not quite cover their living
costs. In the last 12 months, has this happened to you?
a)
Yes
b)
No
c)
Don’t know
d)
Refused
If yes at QM2
Note to authority/Agency: Please add in country specific options under each category.
QM3)(MEM_DO) What did you do to make ends meet the last time this happened?
INTERVIEWER: Probe with: Did you do anything else?
Mark all that are relevant.
DO NOT READ OUT
DO NOT READ OUT _1 Existing resources
a)
Draw money out of savings or transfer savings into current account
b)
Cut back on spending, spend less, do without
c)
Sell something that I own
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DO NOT READ OUT _2 Creating resources
d)
Work overtime, earn extra money
DO NOT READ OUT _3 Access credit by using existing contacts or resources
e)
Borrow food or money from family or friends
f)
Borrow from employer/salary advance
g)
Pawn something that I own
h)
Take a loan from my savings and loans clubs
i)
Take money out of a flexible mortgage account
j)
Apply for loan/withdrawal on pension fund
DO NOT READ OUT _4 Borrow from existing credit line
k)
Use authorised, arranged overdraft or line of credit
l)
Use credit card for a cash advance or to pay bills/buy food
DO NOT READ OUT _5 Access additional credit
m)
Take out a personal loan from a financial service provider (including bank, credit union or
microfinance)
n)
Take out a payday loan
o)
Take out a loan from an informal provider/moneylender
DO NOT READ OUT _6 Fall behind/ go beyond arranged amount
p)
Use unauthorised overdraft
q)
Pay my bills late; miss payments
DO NOT READ OUT _7 Other responses
r)
Other
s)
Don’t know
t)
Refused
ASK ALL
QP1) (BSAVE) In the past 12 months have you been saving money in any of the following
ways?
Note to authority/survey agency: Please do not include pension savings in this question.
Please replace <informal savings club> with appropriate term.
INTERVIEWER: Read categories to respondent. Mark all that apply.
a)
b)
c)
d)
e)
f)
Saving cash at home or in your wallet
Building up a balance of money in your bank account
Paying money into a savings account
Giving money to family to save on your behalf
Saving in <an informal savings club>
Buying financial investment products, other than pension funds [ give examples such as bonds,
investment trusts, stocks and shares]
g)
Or in some other way (including remittances, buying livestock or property)
(No, Don’t know, refused)
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ASK ALL
QP2) (PROV_T) If you lost your main source of income, how long could you continue to cover
your living expenses for, without borrowing any money or moving house?
INTERVIEWER: READ OUT a-e
a)
b)
c)
d)
e)
f)
g)
Less than a week
At least a week, but not one month
At least one month, but not three months
At least three months, but not six months
More than six months.
Don’t know
Refused
ASK ALL (rotate questions)
QP3) (PLAN_ATT) Now, using a scale of 1 to 5, where 1 is completely agree and 5 is completely
disagree, I would like to know how much you agree or disagree with each of the following
statements:
INTERVIEWER: READ OUT EACH STATEMENT AND WAIT FOR RESPONSE
a)
I find it more satisfying to spend money than to save it for the long term
Completely agree, 2, 3, 4, completely disagree (Don’t know, refused)
b)
I tend to live for today and let tomorrow take care of itself
Completely agree, 2, 3, 4, completely disagree (Don’t know, refused)
c)
I am prepared to risk some of my own money when saving or making an investment
Completely agree, 2, 3, 4, completely disagree (Don’t know, not applicable, refused)
e)
Money is there to be spent
Completely agree, 2, 3, 4, completely disagree (Don’t know, refused)
The next section of the questionnaire is more like a quiz. The questions are not designed to trick you
so if you think you have the right answer, you probably do. If you don’t know the answer, just say so.
ASK ALL
Note to authority/agency: Change to local currency
QK2) (DIV) Imagine that five brothers are given a gift of $1 000. If the brothers have to share the
money equally how much does each one get?
INTERVIEWER: READ QUESTION AGAIN IF ASKED
Record response numerically - - a)
b)
c)
Don’t know
Refused
Irrelevant answer
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ASK ALL
Note to authority/agency: Change to local currency
QK3) (TIME) Now imagine that the brothers have to wait for one year to get their share of the
$1 000. In one year’s time will they be able to buy:
INTERVIEWER: READ OUT a-c
a.
b.
c.
d.
e.
f.
g.
h.
More with their share of the money than they could today;
The same amount;
Or, less than they could buy today.
It depends on inflation
It depends on the types of things that they want to buy
Don’t know
Refused
Irrelevant answer
ASK ALL
Note to authority/agency: Change to local currency
QK4) (INT) You lend $25 to a friend one evening and he gives you $25 back the next day. How
much interest has he paid on this loan?
INTERVIEWER: READ QUESTION AGAIN IF ASKED
Record response numerically - - a)
b)
c)
Don’t know
Refused
Irrelevant answer
ASK ALL
Note to authority/agency: Change to local currency
QK5_a) (GROWa) Suppose you put $100 into a savings account with a guaranteed interest rate
of 2% per year. You don’t make any further payments into this account and you don’t withdraw
any money. How much would be in the account at the end of the first year, once the interest
payment is made?
INTERVIEWER: READ QUESTION AGAIN IF ASKED
Record response numerically - - a)
b)
c)
36
Don’t know
Refused
Irrelevant answer
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Note to authority/agency: Change to local currency
QK5_b) (GROWb) and how much would be in the account at the end of five years? Would it be:
INTERVIEWER: READ LIST a-d
a)
b)
c)
d)
e)
f)
g)
More than $110
Exactly $110
Less than $110
Or is it impossible to tell from the information given
Don’t know
Refused
Irrelevant answer
ASK ALL
QK6) (KNOW) I would like to know whether you think the following statements are true or false:
INTERVIEWER: READ OUT EACH STATEMENT AND WAIT FOR RESPONSE
a)
An investment with a high return is likely to be high risk
True/false (don’t know, refused)
Note to authority/agency: if the word ‘risk’ is difficult to translate, we recommend using the following
question. It would be advisable to test both versions if possible:
If someone offers you the chance to make a lot of money it is likely that there is also a chance that you
will lose a lot of money.
b)
High inflation means that the cost of living is increasing rapidly
True/false (don’t know, refused)
c)
It is usually possible to reduce the risk of investing in the stock market by buying a wide range
of stocks and shares.
Note to authority/agency: OR for countries/regions where the stock market will not be widely
understood this version may be more appropriate (It would be advisable to test both versions if
possible):
d)
It is less likely that you will lose all of your money if you save it in more than one place.
True/false (don’t know, refused)
I would now like to ask you a few more questions about yourself and your household. We want to
make sure that we have talked to people from all kinds of households, to reflect our national
population.
ASK everyone the questions in this section
QDi)(GENDER) Interviewer to record gender
a)
Male
b)
Female
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I. 1. A FRAMEWORK FOR DEVELOPING INTERNATIONAL FINANCIAL LITERACY SURVEYS
QDii)(REGION) Interviewer to record or ask and record region
Codes will need adding here by each country
QDiii) (RURAL) Interviewer to record or ask and record rural/urban
Codes will need adding here by each country
QDiii)(LANG) Interviewer to record language interview conducted in
Codes will need adding here by each country
QD3) (AGE) Please could you tell me how old you are, currently?
RECORD AGE --a)
Refused
IF REFUSED AT QD37 Ask:
QD3_a) (AGE_a) Would you instead tell me which of these age bands you fall into?
1.
18-19
2.
20-29
3.
30-39
4.
40-49
5.
50-59
6.
60-69
7.
70-79
8.
80+
Refused
QD4) (ETHNIC) Please can you tell me how you would describe your ethnicity?
Note to authorities/agency: OPTIONAL question
FIELDWORK COMPANY TO ADD IN CODES
a)
b)
Don’t know
Refused
QD5) (WORKSTAT) And which of these best describes your current work situation?
INTERVIEWER: READ OUT: stop and mark the first that applies
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
m)
n)
38
Self employed for 30 hours or more per week
Self employed for less than 30 hours per week
In paid employment for 30 hours or more per week
In paid employment for less than 30 hours per week
Looking for work
Looking after the home
Unable to work due to sickness or ill-health
Retired
Student
Not working and not looking for work
Apprentice
Other
Don’t know
Refused
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QD6) (HHLDINC)
People get income from a wide range of sources. This might include wages and salaries,
benefit payments, pensions or maintenance payments.
Considering all the sources of income coming into your household each month, which of these
categories does your household income usually fall into?
FIELDWORK COMPANY TO ADD IN CODES: Please make sure that median, and not mean
averages are used.
a)
b)
c)
d)
e)
[Low income ( up to 75% of median household income)
[Average income]
[High income (more than 125% of median household income)]
Don’t know
Refused
QD7) (INCSTAB) Which of the following describe how regular or reliable your household
income is?
[use text in square brackets if anyone else might be bringing in an income: i.e. QD2_a greater than 0
or QD2_b is greater than 0]
INTERVIEWER: READ OUT a-d: mark all that apply:
a)
b)
c)
d)
e)
f)
My [our] income varies from week to week, month to month, or season to season
Sometimes I [we] do not receive my [our] income on time
Sometimes I [we] do not receive any money at all
My [our] income is regular and predictable
Don’t know
Refused
QD8) (EDU) And finally, What is the highest educational level that you have attained? [NOTE: if
the respondent indicates that they are a student at QD5, code highest level s/he expects to
complete]:
READ OUT: stop and mark the first that applies (REVERSE ORDER IF MORE APPROPRIATE IN
YOUR COUNTRY)
Note that the interviewers may need some indication as to which professional qualifications
are equivalent to these academic levels of education.
a)
b)
c)
d)
e)
f)
g)
h)
i)
Higher than degree level
University-level education
Technical/vocational education beyond secondary school level
Complete secondary school
Some secondary school
Complete primary school
Some primary school
No formal education
Refused
1
This was based on a classification of residential neighbourhoods that uses census and other data to
classify postcodes into descriptive categories, based on typical characteristics of their residents.
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I. 1. A FRAMEWORK FOR DEVELOPING INTERNATIONAL FINANCIAL LITERACY SURVEYS
PILOT METHODOLOGY
The Financial Literacy Measurement Pilot core questions and socio-demographic questions will
be used to collect information about financial literacy in each of the pilot countries, and to compare
levels of financial literacy across countries.
Data collection process
Each participating country will be responsible for arranging their own fieldwork and data
preparation. The OECD will provide appropriate expertise, guidance and support during this process,
to the extent possible.
Participating countries should identify a reputable survey agency (this may be a private company
or government agency), and discuss with them how the sample will be drawn. It may be possible to
draw a sample where each individual has a known probability of being selected (a random, or
probability sample). However, the chances of selecting people from minority groups using this
method are very slim indeed, and so in some cases it may be necessary to set quotas. A good survey
agency will be able to recommend the best approach for your country. In many countries, the
approach taken is to randomly select locations to sample from, and then set a quota to make sure that
the interviewees are representative of the groups of interest.
It is important that potential participants are contacted at different times of day and throughout
the week. Otherwise, it is very likely that certain types of people, such as the elderly or unemployed,
will be more likely to participate than would be the case in a truly random selection. Similarly, it is
also important to try to contact the same person on several occasions before recording them as a nonresponsive.
The survey agency will either contact the people that they need to interview by telephone or make
a personal call to their home (depending on the method chosen). They will describe the survey to the
potential participant and encourage them to take part in this important research.
The interviewers will ask the questions in the order that they are laid out in the questionnaire and
record the responses. Participants will not be expected to read any of the questions or write down their
answers, and they will never be put under pressure to answer anything that they don’t want to answer.
The information provided by participants will become the raw data for the financial literacy
measurement pilot. This raw data will need to be held in a software package such as Excel or SPSS.
The survey agency will clean the raw data to prepare it for analysis (by checking that values have
been entered correctly, for example) and create any weights that might be necessary to make sure that
the sample represents the population in terms of key socio-demographic characteristics.
Each country should follow the same data collection process, in order to ensure that we can
compare across countries. For this pilot exercise we have drawn up the following criteria:
40
•
The survey is of individuals aged 18 and over.
•
The interviews are personal interviews, undertaken by telephone or face-to-face (i.e. no
internet or paper surveys).
•
The survey fieldwork needs to be finished by December 31st 2010.
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•
There should be a minimum achieved sample size of 1 000 participants per country. We
recommend that survey agencies have an original sample of 1 700 people from which to
draw participants.
•
It is important that questions are translated so that they retain the same meaning;
translators should have a good understanding of idiosyncratic phrases such as “keeping an
eye on” or “making ends meet”. (We note that it will be necessary to modify contextual
information or examples given on some questions with prior agreement – these questions are
indicated in the draft questionnaire).
•
Raw data must be cleaned and saved in a data processing package such as Excel or SPSS
before been sent to the OECD for analysis. The variable names should be based on the
identifying name provided in brackets after the question number (such as KNOW, for QK6).
The label for each variable should reflect the question asked and/or the response given as
appropriate.
•
The survey agency will be responsible for providing appropriate weights to make sure that
the data is representative of your country in terms of i) individuals (not households) ii)
gender mix and iii) age profile. It may also be necessary to weight the data according to
region (please discuss this with the agency).
We also encourage all pilot countries to ensure the following:
•
The survey agency should have a reputation for ensuring good response rates. A good
survey agency will draw a sample of people and, using professionalism and integrity, make
sure that they interview as many of them as possible– this is known as maximising response
rates. We recommend that survey agencies are given a target response rate of 60% - that
means that at least 60% of the people that they contact to take part in the survey should be
interviewed.
•
Test the translated questions on a few individuals before starting fieldwork to make sure
that the translation is easy to understand and the options are clear. Even if the survey is to be
undertaken in English it is valuable to test the questions to ensure the contextual information
is appropriate. If the questions are not well understood, or there is any concern that the
question wording is ambiguous, then this must be addressed before fieldwork begins.
•
Discuss with survey agencies the benefit of setting quotas and/or including booster
samples of hard to reach groups.
We recognise that there are three approaches to data collection that are being piloted: First, some
countries intend to ask the questions as part of a much larger survey; Second, some countries will want
to add a few extra questions to the core questions in order to capture information about issues of
particular relevance; and Third, some countries will use the questionnaire as it stands. For the pilot it is
therefore necessary to be flexible about question order, and we recommend the following approach:
•
If the core questions will be added to a larger survey, they should be grouped with other
questions that address similar topics.
•
If additional questions are going to be added to the core questionnaire they should either be
placed after the core questions and before the socio-demographic questions, or grouped with
similar topics within the core questions – this will depend on the topics to be covered.
•
If the core questions are used without any additional questions, the question order should be
retained.
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I. 2. A FRAMEWORK FOR EVALUATING FINANCIAL EDUCATION PROGRAMMES
Chapter 2
A Framework for Evaluating
Financial Education Programmes
by
Annamaria Lusardi*
It is still relatively unusual for financial education programmes to be evaluated. In this chapter,
the main benefits of programme evaluation are discussed, along with the challenges faced by
evaluation designers and the resulting limitations of existing evaluations. A five tier evaluation
framework is assessed as a potential solution to improve evaluation design whilst still allowing
flexibility.
*
Professor, Dartmouth College, USA
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I. 2. A FRAMEWORK FOR EVALUATING FINANCIAL EDUCATION PROGRAMMES
1. The Issue: The necessity of evaluating financial education programmes
Over the past thirty years, individuals have had to become increasingly responsible for their own
financial well-being. The shift from defined benefit (DB) to defined contribution (DC) plans in many
countries has meant that workers today have to decide both how much they need to save for retirement
and how to allocate their pension wealth. Furthermore, financial instruments have become increasingly
complex and individuals are presented with new and ever-more-sophisticated financial products.
Access to credit is easier than ever before and opportunities to borrow are plentiful. Are individuals
well equipped to make financial decisions? Unfortunately, many studies have documented that the
majority of individuals lack the knowledge of basic financial concepts, such as interest compounding,
inflation, and risk diversification; concepts that form the basis of financial decision-making. Moreover
and most importantly, lack of knowledge has been found to be associated with lack of retirement
planning, lower wealth accumulation, problems with debt, and poor investment choices (see Lusardi
(2008, 2009) for a discussion of these issues).
Perhaps as evidence that financial illiteracy is considered a severe impediment to saving,
governments, employers, and not-for-profit organisations have promoted financial education
programmes. The effects of financial education programmes have not yet been precisely assessed.
Several programmes provide some evidence of a general positive effect of financial education on
behaviour, but the impact of specific programmes and teaching methods is still unclear. The question
“what works best?” has not been clearly answered. The evaluation of these programmes is critically
important.
Programme evaluation is crucial for three reasons: (1) to assess the magnitude of a programme’s
impacts on participants and the community/population as a whole; (2) to verify how resources and
funds are spent; and (3) to ultimately improve the effectiveness of a programme. National
governments and private financial education providers need to allocate resources efficiently: resources
should go to the programmes that are most effective. They also need to fund programmes adequately
and make sure that resources are allocated to the designated objectives. Finally, they need to find ways
to improve upon existing programmes. In principle, evaluation is crucial for any type of financial
education initiative, irrespective of the size of the programme. Without an evaluation, no programme
can claim success. Consequently, proper evaluation should be one of the requirements for obtaining
funding for both initial and repeated financial education initiatives.
Currently, not every programme performs an evaluation of its impacts, and when an evaluation is
performed, different methodologies are often used. Thus, it is very hard to make consistent
comparisons across programmes. Moreover, not all evaluations follow rigorous evaluation methods
that allow investigators to pin down the effect due to a programme alone, rather than to other
confounding factors. In order to identify the most effective ways to improve financial education, it is
important to establish a rigorous evaluation methodology that can be applied to all programmes. As
explained by Lyons et al. (2006): “The challenge is to create a tool that is flexible enough to meet the
needs of a wide variety of individual programmes, yet standardised enough so that it can be used to
make comparisons across programmes.” The evaluation should be conducted following scientific
conventions in order for results not to be dismissed or undervalued. Moreover, if all evaluations follow
similar measurement methods, policy makers will be able to compare the results and gain insights on
what is most effective. This evaluation system would give policy makers the opportunity to identify
the best methods to make financial education successful and to effectively tailor programmes to
specific audiences.
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2. Existing Literature: Some difficulties in evaluating financial education programmes
So far, there are no commonly accepted definitions of financial education. The OECD definition
of financial education provides a useful framework to refer to:
Financial education is the process by which financial consumers/investors improve their
understanding of financial products and concepts and, through information, instruction
and/or objective advice, develop the skills and confidence to become more aware of financial
risks and opportunities, to make informed choices, to know where to go for help, and to take
other effective actions to improve their financial well-being. 1
Evaluating financial education has proven to offer many challenges. Several scholars have
examined the evaluation of financial education programmes. Reviewed below are several studies in
the field, including Fox and Bartholomae (2008), Fox et al. (2005), Lusardi (2004, 2008), Lusardi and
Mitchell (2007), Lyons et al. (2006), Hogarth (2006), O’Connell (2009), Crossan (2009), Cakebread
(2009), and Collins and O’Rourke (2009). From these studies, the main challenges and limitations of
the current state of evaluation studies are identified as follows:
•
Lack of a theoretical framework. Some programmes target changes in behaviour that are
not consistent with what prescriptive models of behaviour would predict. For example, a
programme might simply target increases in savings. However, if the target population is
young adults facing an upward sloping age-earning profile, economists would argue that they
should be borrowing and not saving. Similarly, increasing saving may not be an optimal
strategy if participants carry debt. In other words, the outcome of a programme needs to be
in line with what is best for participants rather than ad-hoc indicators of behaviour.
•
Potential biases. There are several potential biases in the evaluation process. The first is
self-selection: programme participants are often not chosen randomly. Participants may
choose to attend a programme because they are interested in improving their economic
situation. In choosing to take advantage of a programme, they may be demonstrating
motivation that other individuals do not share. Thus, the effects on this group may
overestimate the effects the programme would have on other randomly selected groups of the
population. Similarly, some groups may be the target of financial education programmes
because of their behaviours, i.e., financial education could be remedial and offered to those
who save the least or face financial problems. This leads to an underestimate of the effect of
the education programme on random groups of the population. Another potential bias is
attrition bias: participants may drop out during the programme or may not answer follow-up
surveys, causing not only a loss of data but also loss of the representativeness of the sample.
Low response rates to surveys conducted months after the programme is also a problem.
•
Measurement issues. It is possible that financial education programmes may simply
improve how participants report their assets and debt rather than have an effect on saving
and debt behaviour. Moreover, because of data confidentiality or lack of access to
administrative records, assessment is often based on surveys distributed to participants
before and after financial education programmes. However, self-reported information may
not always reflect actual behaviour or may measure behaviour with a lot of error.
•
Difficulty proving causation. Because it is difficult to control for the many factors that
affect behaviour, it is difficult to prove that programmes cause changes in behaviour. To do
so, it is important to have a rich set of data. Due to the presence of many other factors that
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I. 2. A FRAMEWORK FOR EVALUATING FINANCIAL EDUCATION PROGRAMMES
are difficult to control for in empirical works, many studies prove correlation rather than
causation.
•
Lack of a comparison group. Most studies do not include a comparison group; as a result,
it can be hard to prove that the measured improvements are due to participation in the
programme. Comparing programme participants to similar individuals who did not attend the
programme provides strong evidence of the changes induced by the initiative. The presence
of a comparison group therefore helps isolate the specific effects of the programme. An
experimental or quasi-experimental design provides more reliable data than a “descriptive”
experiment, in which the changes in participants are evaluated only through a pre-test and a
post-test.
•
Lack of comparison of outcome with size of intervention. Programmes rarely compare
outcome with the size of the intervention. For example, some programmes assess the effect
of one retirement seminar or the effect of sending participants to a benefits fair. Some of
these interventions may simply be too small to generate any effects. If participants have very
low financial literacy or face very large search and information costs, one retirement seminar
may simply be insufficient to generate any effects. This is not because a financial education
programme is ineffective, per se, but because the size and intensity of the programme is
insufficient to generate a change in behaviour.
•
Difficulty assessing efficacy of different delivery methods (e.g., lectures, brochures, and
videos). Most financial education programmes combine two or more delivery methods, and
few programmes are able to control for individual effects of the different methods.
Therefore, it is very hard to determine outcomes of each method and to compare them with
similar programmes that use a different number of delivery methods.
•
Practical hurdles. Most prominent are the high cost of a thorough evaluation, the limited
funding for evaluation programmes, and the lack of technical expertise.
•
Publication bias. Evaluators and financial education advocates may not be willing to
publish their studies if the results are unsuccessful. Certain non-experimental designs can
allow evaluators to show better programme outcomes than do experimental techniques,
consequently biasing evaluation toward that which appears most favourable.
•
Data are often not comparable. Different studies use different methods, measures,
indicators, and parameters, even if they ultimately evaluate the same thing. There is currently
no agreement on the most appropriate indicators, outcomes, and measurable changes to
use in evaluating financial literacy programmes.
Some initial Suggestions on how to improve the evaluation of financial education programmes
The difficulties mentioned above are serious and there has not been much agreement on how to
address them. Some of these difficulties can be mitigated via experimental design, standardisation, as
is explained below.
The importance of an experimental design
Evaluations following an experimental or quasi-experimental design, rather than merely being a
“descriptive study,”2 offer more reliable proofs of programme effects. An experimental design would
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use a fully randomised “treatment group” and a “control group.” A quasi-experimental design does not
randomly select the participants of a programme, but uses a pre-selected group and tries to construct a
“counterfactual group” that shares the features of the individuals attending the programme. The
counterfactual group, which will not attend the programme, will undergo the same assessment
processes and will resemble the treatment group as much as possible in characteristics such as age,
sex, social class, and ethnicity. Assessment of the control group and counterfactual group help isolate
the effects of the programme from other potential factors influencing the outcome(s), informing the
evaluator as to whether the changes in the participants’ behaviour were caused by the programme or
not. As Collins and O’Rourke (2009) remark, a strictly experimental design should be the “gold
standard” for an evaluation study because it avoids self-selection bias. However, for practical reasons
or budget constraints, it is often not feasible to follow this route. Quasi-experimental studies are easier
to conduct and still provide reliable results. Financial education providers who cannot afford
expensive experimental evaluations may consider turning to a quasi-experimental design.
The experimental or quasi-experimental design can address the problem of self-selection and the
confounding effects resulting from external factors and better assess causality. However, it is
important to note that an experimental design alone does not offer solutions for all of the difficulties
mentioned above. Although experimental studies are able to control for differences between treatment
and control groups, the outcomes of a financial education programme may still be hard to detect if the
size of the intervention is not significant enough. For example, a study by Duflo and Saez (2003)
undertook an ingenious randomised trial to assess the impact of attending a benefits fair on retirement
savings for employees of a major U.S. university. They show that attendance of the fair had a rather
modest effect on retirement savings. The study is a good example of a rigorously designed evaluation
whose conclusions are hard to interpret: it is not clear whether the small impact on savings is due to
the ineffectiveness of providing information and education to employees or to the small size of the
intervention, i.e., a single benefits fairs may have minimal impact on behaviour in the face of
widespread financial illiteracy and general lack of financial information.
Controlling for spillovers
An important issue when conducting randomised evaluations of large-scale financial education
initiatives is the spillover of programme impacts from recipients of the programme to non-recipients, a
point which has been highlighted in programme evaluation in the field of development economics.
Duflo and Saez (2003) show that spillovers happen due to sharing of information and influence
people’s motivation to increase their financial well-being. In their study, they observe a spillover
effect in the form of information transfers between colleagues in the workplace. Spillovers may also
influence the measurement of impacts in a larger-scale experiment, such as a financial education
project in several communities located in the same geographical region. If the evaluation was
conducted as a randomised field experiment in which a specific programme was implemented in some
towns and not in others, it is very likely that the programme will find some effects (i.e., the effect will
spill over) for the communities that were not “treated.” Positive spillover effects are beneficial overall
as they help financial education providers indirectly reach a larger number of people. Spillover effects
are a potential problem for evaluators, however, because they risk diminishment of the measured
impacts of a programme: If the control group of a randomised-trial evaluation benefits from a
programme attended by the treatment group, a comparison of the two groups will be less likely to
show any impact. The evaluation conducted by Duflo and Saez (2003) was able to measure the degree
of information transfer between employees of a U.S. university.
For programmes implemented on a larger scale (e.g., many schools or communities in an entire
region), the field of development economics offers insights on how to get around these problems or to
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measure the spillover itself. Miguel and Kremer (2004) measure the spillover effect of deworming
treatments in primary schools in Kenya by randomly selecting a third of the schools in a region. By
comparing attendance rates in primary schools, they found that non-treated schools located closer to
treated schools also had increased attendance rates after the administration of the treatment.
Furthermore, by treating only a portion of the student body in a school, they showed that non-treated
pupils in treated schools also became healthier, simply by interacting with treated children.
Programme design and evaluation design
The planning of a programme evaluation should begin with the planning of the financial
education programme, should receive a budget consistent with its objectives, and should be tailored to
the characteristics and the specific objectives of the initiative. Programme implementation and
evaluation go hand in hand; the evaluation should be part of the programme itself and not done as an
afterthought. Only in this way can pre-implementation, baseline data be collected.
Standardisation and flexibility
Financial education programmes are very diverse. They embrace a wide range of topics,
objectives, audiences, and pedagogic methods. For this reason, evaluation studies should be flexible
enough to be tailored to the different programmes while maintaining a determinate standard. Such
standardised evaluations would allow implementers and policy makers to compare programmes and
answer important policy questions:
•
What and of what magnitude are the impacts of financial education programmes on the
financial literacy level of the participants?
•
What types of programmes are most effective? (school-based programmes, after-school
programmes, workplace programmes, etc.).
•
What delivery methods are most effective? (counselling, workshops, lectures, interactive
exercises, etc.).
•
Is financial education the most effective way to improve financial literacy? Are there other
initiatives that can achieve better results?
•
Which programmes should the government implement and which should it discourage?
•
Given the specificity of each programme and the necessity for comparison of results, there is
often a need for a compromise between flexibility and standardisation, perfect tailoring and
homogeneity.
Privacy Issues and respect of confidentiality
One important concern shared by many programmes is the treatment of confidential data and
respect for privacy. This is important to improve response rate, moderate attrition biases, and address
some of the measurement problems discussed above. Evaluation questions may ask participants to
report their annual incomes, divulge their income sources, or provide other information regarding their
financial situation (e.g., whether they have a savings account and how much of their income they
allocate to a pension fund). Participants may feel uncomfortable sharing this information with
evaluators, particularly if they do not know who will be able to access the information they provide.
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Fear of sharing confidential data may significantly decrease the response rate. For example,
participants who are not citizens may be afraid to provide information regarding their sources of
income, as they worry they could be reported to governmental authorities for irregular labour
activities. At small retirement seminars at a single firm, employees may fear possible repercussions of
sharing private financial information with their employers.
Evaluators should always respect confidentiality when conducting tests, focus groups, and
follow-up surveys. Moreover, they should explain privacy policies to participants so those participants
can complete the evaluation more confidently. There are several best practices to assure the respect of
privacy of financial information. A primary confidentiality measure is to destroy all data, including
contact information, in a timely and secure manner after the conclusion of the evaluation. In this way,
participants can be sure that once they have filled out all necessary evaluation forms, including a
possible follow-up survey via mail, their contact information will not be passed to anyone else.
Another important practice is creation of a system of ID numbers connected to participants. The
participants use ID numbers instead of names on every evaluation form they fill out, and the evaluator
is not able to track a form to a specific person (see NEFE online evaluation toolkit by Lyons,
Jayaratne, and Palmer for more information on the ID number practice).
Some ways to facilitate the evaluation of financial education programmes
A national Benchmark and a national strategy for financial education
Establishing a benchmark for the financial literacy level of a country can be crucial to facilitating
financial education programmes and their evaluation; a national survey measuring financial literacy
and financial behaviour is useful for the design and evaluation of both large-scale and small-scale
financial education initiatives. A national survey can provide key insights into the state of financial
knowledge and the demographic groups that are most lacking in that knowledge. Financial educations
providers can then use this information to tailor programmes to the needs and characteristics of the
targeted population. For evaluation purposes, a national survey can establish a baseline financial
literacy level that can be used as a yardstick in assessing the effectiveness of a financial education
programme. The design and evaluation of financial education programmes of any size, from local
seminars to large public policies, can greatly benefit from the existence of a national benchmark.
A national strategy for financial literacy could also provide critical help for evaluation as follows:
•
identify the main areas where intervention is needed (e.g., access to credit, default in loan
payments, lack of information);
•
determine the at-risk populations (e.g., young people, single parents, senior citizens);
•
give general guidelines for smaller financial education providers; and
•
identify the organisation that can assume a leading role in the financial education effort in
the country, coordinating the work of financial education providers, and minimising the
overlaps.
Agreement on Indicators and establishment of an international benchmark
As Crossan (2009) points out, there currently are “no proven or agreed indicators or measures for
financial literacy.” Such an observation calls for the need to create a standardised, possibly
international, indicator of financial literacy. This would have several advantages:
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•
It would allow the impacts of one programme on financial literacy to be compared to those
of another programme nationally and/or internationally.
•
It would allow for the establishment of a national benchmark, an average financial literacy
score for each country, utilising the same measures that evaluate financial education
programmes, so that:
a)
nations could compare their financial literacy levels with those of other countries;
b)
each programme could compare its outcomes with the national benchmark score; and
c)
national programmes could track their impacts over the years.
The establishment of a common measure of financial literacy and a national benchmark facilitate
not only the evaluation of financial education programmes but also the comparison of the effects of
these programmes across countries.
3. A five-tier evaluation framework
To address the limitations of current evaluation studies, several scholars have proposed the
creation of an evaluation framework that could serve as a guideline for all programme implementers
and evaluators. Such a framework could help the implementers design the evaluation in a standardised
way while tailoring it to their specific programme. In Evaluating the effectiveness of financial
education programmes (2009), O’Connell proposed a new version of a five-tier framework that was
first introduced by Jacobs (1988) and later elaborated upon by Fox and Bartholomae (2008).3
O’Connell’s five-tier approach has many advantages and constitutes an important step toward a
standardised but flexible scientific evaluation. In fact, it allows researchers and evaluators to follow an
experimental design if desired, to tailor the evaluation to specific audiences and objectives, and to
maintain a large degree of similarity with the evaluations of related programmes. The framework is
rather broad and provides overall a general direction toward which evaluators can work. More
discussion about this approach is reported below.
O’Connell’s denomination of the five tiers is different than proposed by others; Le Brun (2009)
proposes a more conventional denomination used by scholars in the field of evaluations: the so-called
Traditional Model Approach. Despite the new denomination, the content and function of the tiers
remain the same. Table 1 compares the two denominations.
Table 2.1 : The two denominations of the five-tiered evaluation framework
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O'Connell denomination
Traditional Model
Needs
Programme Objectives
Accountability
Programme Inputs
Fine-Tuning
Programme Delivery
Micro Impacts
Programme Outcomes
Macro Impact
Programme Impact
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As previously mentioned, programme evaluation should go hand in hand with programme design
and implementation. As Fox and Bartholomae (2008) point out, the five-tiered approach “encourages
evaluation to occur in each stage of programming.”
There are three overarching themes of the evaluation that cut across the tiers. As also discussed
by Hogarth (2006), these themes are: 1) objectives, 2) audience, and 3) available resources. They are
crucial not only for the design of the evaluation, but also for the planning of the programme itself.
Objectives: The questions to answer are: What are the objectives of the programme? What
aspects of financial literacy is the programme trying to improve? This theme is not only part of the
Programme Objectives tier—where the objectives are defined—but affects all the other tiers as well.
In fact, the implementer should always consider the programme objectives when identifying the input
(what type of class, how many hours, what budget, how many teachers, etc.), the delivery system
(what type of teaching system best suits the objectives: lecturing, interactive lecture, activities,
workshops, online course, personal counselling, etc.), and the outcomes (based on the objectives that
were identified, which outcomes should be expected: e.g., better control of financial transactions and
bookkeeping if the objective of the programme is increasing responsibility for and care of household
finances).
Audience: The questions to answer are: What type of audience is the programme targeting and
who are the programme participants? These issues are first addressed in the Programme Objectives
tier, as the objectives may be strictly connected to a specific group of people, but they should then be
considered in all the other tiers. When designing the programme, the implementers should ask what
types of input and delivery systems best suit the audience (e.g., a primary school programme would be
more likely to reach a large number of students, with several hours of classes distributed throughout
the year, and use interactive exercises and activities to help children learn; on the other hand, a
retirement workshop for a firm’s employees might aim at two or three meetings in the same week,
with a restricted number of participants, and have a more straightforward, lecture-type delivery
method). The outcomes and impacts will also be measured in different ways depending on the
audience. For example, high school students might receive surveys that assess critical thinking and
direct application of the knowledge acquired, while adult employees might receive a straightforward
survey assessing knowledge, attitudes, and behaviour.
Available resources: Evaluations are costly. Some methods are more expensive than others;
given the budget constraints of most programmes, not all methods will be affordable. Evaluators
should carefully consider existing resources and budget constraints. Thus, objectives, inputs, and
delivery methods, for example, have to be chosen in keeping with the resources that are available for
the programme and the evaluation.
4. Implementation of the five-tier framework
O’Connell’s five-tier approach is a sound basis on which to create a more detailed framework for
the evaluation of financial education programmes. The tiers give good direction for evaluators, but
more specific guidelines and information on tools, measurement methods, and indicators are needed.
This chapter provides further implementation of the five-tier framework to establish a more detailed
guideline for future financial education evaluations. Each tier is analysed, giving a quick definition of
its objectives, and possible options are provided of what could be measured in each section and how it
could be measured. For the last two tiers, where evaluation could take very different paths depending
on the type of programme, some of the limitations of the potential methods are analysed. Le Brun’s
(2009) denomination is used but also O’Connell’s (2009) tiers is included in Table 2.
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Table 2.2 : The implementation of the five-tiered framework
O'Connell
Denomination
Need
Traditional
Approach
Model
Programme
Objectives
Accountability
Programme
Inputs
Fine-Tuning
Programme
Delivery
Micro-Impact
Programme
Outcomes
What to Measure
Financial literacy scores
Levels of bankruptcy
High debt
Low savings
Costs of the programme
Duration of the programme
Size and characteristics of the
target group
Teaching methods/delivery
What in the programme was
effective
What was not effective
What can be improved
What should be changed or
completely eliminated
Knowledge Outcome
Attitude Outcome
Behaviour Outcome
Macro-Impact
Programme
Impact
Other Outcome
Financial literacy scores
Other indicators of financial wellbeing: i.e., income level, savings
level, indebtedness.
How to Measure It
Financial literacy survey to
target group
Existing financial literacy results
Publicly published data on
specific issues
Description of teaching
methods, etc.
Survey at the start or end of
programme
Data on programme expenses
Post-survey to participants and
teachers
Focus groups
One-on-one interview
Pre- and post-test
Alternative assessment
Criterion reference group test
Follow-up survey
Pre- and post-test
Alternative assessment
Follow-up survey
Focus groups – One-on-one
interview
Follow-up survey
Alternative assessment
Focus Groups – one-on-one
interview
Administrative records
Follow-up survey
National survey conducted
regularly
National survey conducted
regularly
5. Analysis of the five tiers
Programme objectives
Programme Objectives is the tier that deals with the purpose of the programme and identifies its
aims. The objectives are normally addressing one or more problems related to financial literacy, which
could range from general lack of financial literacy to a more specific issue such as high number of
defaults on mortgage payments. The evaluator should verify the existence and relevance of such issues
before the programme is implemented. O’Connell called this tier “Needs” because it identifies what
should be improved in the community. In order to identify needs and objectives, the evaluator should
also identify the target audience (e.g., high school students, retiring workers, low-income families).
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Below are some of the possible measures to verify needs and set objectives that Fox and
Bartholomae (2008) provide:
•
Testing financial literacy levels in the target population in the case of a general financial
education programme. The implementer can take advantage of pre-published data if they
exist; otherwise financial literacy tests can be administered among a random sample of the
target group.
•
High rates of small-business bankruptcy, high levels of consumer debt, and low savings can
be used as indicators of poor financial literacy and of poor financial management. To
evaluate needs using these indicators, the implementer should find statistics and data on the
target community.
•
More specific data can be used for particular programmes, such as high levels of default in
the repayment of mortgages for a programme on financial management for families that are
planning to buy a house. Publicly available data or new survey data could be used for such
issues.
Programme inputs
This tier analyses the “inputs” of the programme. It deals with the collection of information
regarding the education programme itself and the service provided: its costs, its length, what it teaches,
and who participates (number of participants and particular characteristics such as ethnicity, education
level, and income level). As Fox and Bartholomae (2008) discuss, the goal of this tier is to assess
whether the target group is affected by the programme and in what way. Precise information about the
target group is also important to create a well-tailored control group.
Information on inputs can be gathered with a survey given during programme registration, at the
end of the programme, or at another appropriate time.
Any programme should pay attention to the inputs both for cost considerations and for
accountability.
Programme delivery
The programme delivery tier assesses the way the programme was implemented, whether and
what was effective, and what should be changed to improve it. One effective way to receive feedback
on programme delivery is by directly asking both participants and instructors. This can be done
through specific surveys at the end of the programme. Students and instructors should be provided
with different surveys, as their observations on the programme come from different perspectives. The
survey could ask participants and instructors to rate the effectiveness of specific teaching methods or
course material as well as ask open-ended questions (e.g., what was the most/least effective part of the
course?). While participants could be asked how the programme affected them, the instructors could
be asked what improvements they saw in participants. Other possible evaluation tools in this tier are
focus groups and in-depth interviews with participants or instructors. These two methods can provide
valuable qualitative data to better put into context the results of the quantitative data collected through
the survey. They might substitute for open-ended written questions and allow for additional
comments.
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Programme outcomes
All direct effects of a programme on participants are considered programme outcomes. Outcomes
can generally be divided into subsets: knowledge outcomes, attitude outcomes, behaviour outcomes,
and practical outcomes. Each subset assesses different aspects of the overall effect of the programme
and is measured with different, although often overlapping, methods.
Knowledge outcomes
Knowledge outcomes measure changes in programme participants’ knowledge of specific
financial concepts (e.g., how compound interest works) or programme-related concepts (e.g., how a
firm’s retirement plan works).
There are several methods through which to assess knowledge outcomes:
•
Pre- and post-test. This is a test or survey administered to participants before and after a
programme to measure change in knowledge of general financial literacy concepts and/or
concepts specific to a programme. The pre- and post-test should be well tailored to the
programme audience and objectives. The design of the pre- and post-test must account for
age and education level of participants. For example, school children who participate in a
course on financial responsibility could receive a test with very simple language, with the
questions perhaps supported by images. Low-education employees could be given a test with
language and concepts that are simpler than those directed to employees who are college
graduates. The results of a post-programme test can be compared both with pre-programme
and control group results.
•
Criterion Reference Group Test (CRT). This test can be used for specific groups of
individuals who may have problems with reading and writing (for example, very young or
very old participants, or participants with low education). The CRT is similar to a group preand post-test, but is conducted orally. The instructor asks the questions out loud to the group;
individuals may answer and other participants can supplement or correct those answers.
Based on correctness and thoroughness, scores are assigned to the answers. This type of
evaluation is also applicable to groups who are unlikely to be familiar with or who are
uncomfortable with written tests.
•
Alternative assessment. The alternative assessment presents participants with hypothetical
scenarios, vignettes, and exercises to which they have to apply the concepts they have
learned. The alternative assessment is mainly used to assess attitudes and expected
behavioural changes rather than objective knowledge or actual behavioural changes. The
alternative assessment has both advantages and limitations.
Follow-up survey. A survey conducted some time (months or even years) after the programme
can measure knowledge retained by individuals long after their participation. The evaluator should be
aware, however, of the many external factors that might contribute to and influence the knowledge of
programme participants in the intervening time period.
Attitude outcomes
Attitude outcomes measure the effects of a programme on participants’ attitudes toward financial
literacy and financial responsibilities (e.g., the participant plans to keep closer track of his/her
expenses in the future, says he/she will seek more information before purchasing a new financial
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product) or toward the topic specifically dealt with by a programme (e.g., the participant now believes
it is very important to plan ahead for retirement). Attitude outcomes also assess the participant’s level
of self-confidence regarding general or specific issues (e.g., the participant feels more/less confident
dealing with loans and mortgages) following the programme.
There are several methods through which to assess attitude outcomes:
•
Pre- and post-post survey. The same pre- and post-test used for knowledge outcomes can
include a survey to assess attitudes and self-confidence. The attitude results before and after
the survey can be compared; participant responses could also be compared with those of a
control group.
•
Alternative assessment. The alternative assessment exercises used to evaluate knowledge
can also be used to assess the self-confidence of participants in dealing with particular issues
or handling specific concepts.
•
Follow-up survey. Attitudes can be measured months or years after the programme via a
follow-up survey.
•
Focus groups. These groups are selected to discuss and share their experiences, attitude
changes, and actions they are planning to take in the future. Focus groups should normally be
held immediately after the conclusion of a programme. Focus groups scheduled for weeks or
months after an initiative are less likely to be informative, as the direct effects of a
programme may be disturbed by other external factors.
Behaviour outcomes
Behaviour outcomes are changes in behaviour normally associated with general economic issues
(e.g., the participant has opened a savings account and/or keeps better track of his/her transactions) or
specific issues addressed by a programme (e.g., the participant has changed his/her retirement plan or
has bought a different financial product). Behaviour changes can be measured months or even years
after a programme.
One way to assess the impact of a programme on behaviour is with follow-up surveys conducted
a determinate amount of time after a programme. Done via phone or mail, or even face-to-face, such
surveys assess how participants’ financial behaviour has changed compared to earlier behaviours,
which were identified through a pre-programme survey. Focus groups can also be used to gather
qualitative data, asking participants to discuss their changes in financial behaviour. Another method is
to collect data on behaviour using administrative records, for example bank records, employer records,
or government records.
Other outcomes
Other Outcomes refer to specific outcomes, including changes in the financial well-being of
participants. A follow-up survey can be used to determine these outcomes. Participants can be asked
questions about their level of savings, investment income, retirement plans, satisfaction with their
financial situation, or other indicators of financial well-being. The results should then be compared
with the data collected via a pre-programme survey and with national data, if they exist. Countries can
differ widely on measures of financial well-being and these differences need to be taken into account
in performing an international comparison.
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Programme impact
This last tier refers to the programme impact at the macro level and is relevant only for
programmes that have a large scope (national or at least regional). The issue addressed in this tier is
the effect of the programme on society as a whole; its impact relative to other possible initiatives to
increase financial literacy and financial well-being in general. The measurements of this tier will be
statistics and data at the national level regarding, for example, financial literacy, level of savings,
percentage of households with checking/savings accounts, overall self-confidence of the citizens, etc.
This last tier reinforces the importance of establishing a national benchmark and keeping track of
changes over time in financial literacy and other indicators. The evaluators in this case need to assess
whether programmes (such as mandatory school-based financial education) create improvements over
time in the entire community, not only among the people who participated in a financial education
initiative.
One way to evaluate macro-effects is by conducting national surveys to analyse trends and
changes in financial literacy and in other indicators. In order to do so, a standard survey with a
determinate set of questions and a common measurement method should be established and
maintained without alteration. In this way, the results of the surveys can be compared over time. These
surveys can be conducted by the government or other agencies.
Some pitfalls in the implementation of the five-tier approach
The implementation of the five-tier approach faces many challenges. Some of these problems are
again highlighted below and they can instrumental in the success or failure of the implementation of
the programme.
Programme objectives
Sometimes the objective of a programme is not properly spelled out or is not well known to the
evaluator or the reviewer of the programme. For example, some financial education programmes may be
initiated to satisfy specific regulatory restrictions. Employers may offer retirement seminars to comply
with laws. Similarly, financial counselling has become mandatory in some bankruptcy procedures. While
the improvement of financial literacy may be a declared objective, it may in fact be secondary to the
objective of complying with the law. Several studies have been done, for example, to assess the impact
of employer-provided financial education programmes in the United States. However, the investigator
often had limited or no data on the reason for initiation of the financial education programmes.
The objectives of the programmes also call into play the importance of an independent
evaluation. Because the objectives of programmes are often improvements to financial literacy or to
financial behaviour, there is a potential bias in reporting only the parts of the programme that work
and downplaying or not reporting what does not work. However, the latter can be of great importance,
too. Similarly, there is an incentive to choose evaluations that are flexible and tend to favour finding
an effect, such as relying on descriptive methods rather than experimental methods.
Programme inputs
Very few studies report the costs of implementing a programme and it is consequently hard to
truly assess effectiveness. Moreover, it is hard to make comparisons across programmes. One way to
do so would be to rely on indicators such as the return on investment, which are, however, not
applicable to every programme.
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Programme delivery
Many programmes do not use more than one delivery method and it is therefore hard to
disentangle whether (lack of) effectiveness is due to the programme design overall or simply to its
delivery. For example, programmes relying on brochures, calculators, and heavy statistics may be
unappealing to participants with low financial literacy. The programme may in fact be effective with a
different audience but a mismatch between delivery method and recipient characteristics can make it
ineffective.
Programme outcomes
As mentioned before, it is difficult to measure the outcome of the programme properly.
Pre-test, post-test, and survey
The main weakness of the pre- and post-test is that some of the indicators of attitude, selfconfidence, and behaviour are self-reported. They can be biased indicators. The participant may also
be uncomfortable reporting data on savings and debt and/or report them with error.
Follow-up survey
A follow-up survey is a good method through which to assess changes in behaviour, knowledge,
attitude, and well-being. However, it faces challenges and limitations. One hurdle is cost. This type of
survey, conducted via phone, mail, or face-to-face interview several months or years after the
programme, is often very expensive.
The second limitation is the so-called attrition bias: as noted by Collins and O’Rourke (2009),
many participants will not reply to a mail survey or will not be reachable by phone. This will cause a
significant loss of data. There are other biases as well: the individuals who respond to a follow-up
survey may be those who are more motivated to improve their financial well-being. Therefore, the
results may be biased toward finding a result. Another possible bias is the fact that data on attitude,
income, and financial well-being are self-reported and the evaluator often cannot prove whether the
interviewed person is answering truthfully. Another limitation is that a follow-up survey cannot in any
way control for other variables that might affect the results. For example, participants might have
taken more financial education courses in the time period between programme and follow-up survey;
they might have received a promotion at their workplace, etc. These events can affect behaviour and
are hard to control.
Focus groups
Focus groups are a good method through which to obtain qualitative data on participants’
opinions on the effects of a programme. They give the evaluator an opportunity to collect extended
data that closed-ended questions and numerical scores of the pre- and post-test are often not able to
communicate. With focus groups, specific details of the programme can be discussed in detail,
including complaints and suggestions for improvement.
Programme impact
Delays in publishing data
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One major limitation of assessing the impact of large programmes is the long time frame
necessary to collect, elaborate, and publish data from large surveys. It may take months or sometimes
years to collect data at the national level and to elaborate the results from the data. The costs of such
surveys are high and often require a significant amount of resources.
Baseline and national surveys
Without a baseline to refer to in order to assess the impact of a programme, every single
programme will have to collect data. Because baselines can be useful for a variety of programmes, it
may be particularly valuable to centralise the collection of those data.
6. Recommendations
There are several recommendations that emerge from the five-tier approach, particularly for
private and not-for-profit institutions. These institutions play a key role in promoting financial literacy,
given the importance of a grassroots approach to promote financial literacy and financial education
programmes.
The primary recommendation is simply a reinforcement of the importance of evaluation. Without
an evaluation, no programme can be considered effective, and this can severely limit not only its
adoption by other institutions, but also its funding. Thus, time, effort, and resources need to be
allocated not only to programme design but also to programme evaluation. And, as mentioned
throughout the report, design and evaluation should go hand in hand, and the evaluation should be part
of the programme from the very beginning.
Given the inherent difficulties of measuring the effects and assessing the impacts of a
programme, a variety of methods and tools should be employed. Using different methods will allow
evaluators to obtain a more complete and multifaceted view of a programme’s impacts. For example,
both qualitative and quantitative data can be part of an evaluation. They serve different purposes and
can provide complementary insights into the impact of and ways to improve upon a programme.
Given the many biases in evaluating the effectiveness of financial education programmes,
experimental or quasi-experimental methods should be given priority. It is often hard - if not
impossible - to get around self-selection biases and be able to assess the causality between financial
education and financial behaviour. Being able to rely on a control and a treatment group both
facilitates the assessment of the impact of the programme and gives the programme more credibility.
Clearly, one of the best ways to evaluate an educational initiative is to enlist an independent
agency with professional expertise in the field to conduct the evaluation. However, professional
agencies are expensive and their costs can be prohibitive for small, private organisations. Public and
private higher-education institutions (such as colleges and universities) are perhaps an alternative to
professional evaluation agencies. Higher-education institutions are frequently interested in
partnerships which give them the opportunity to do research and gather new data. Small organisations
could also take advantage of free (online) evaluation toolkits and resources, for example those
provided by the OECD, their national governments, educational institutions, or other private
organisations. Online resources provide important material that can help prevent common mistakes
and propose best practices. Toolkits like the one designed by Lyons, Jayaratne, and Palmer for NEFE
are user friendly and flexible, giving evaluators the ability to use established questions on a wide range
of topics or create their own questions while maintaining the standardised layout of the evaluation.
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Continuing on the previous point, evaluators should rely on external support (and partnerships) to
conduct their analysis. Peer-reviewing of the evaluation methodologies before the implementation of
the study and prior to the publication of the results is highly recommended.
Resources dedicated to financial education and its evaluation are scarce. Some coordination may
be not only helpful but will likely benefit the community at large. For example, a baseline establishing
the level of financial literacy and measuring at-risk financial behaviour can be done in a centralised
way, without having each institution run a survey. Moreover, there may be a lot of overlap in the type
of programmes and the target population. For example, many programmes have set up websites to
provide information and help with financial decisions and, in doing so, institutions may end up
replicating the efforts of other similar organisations.
There has been little attention to dissemination of results in the discussion of programme
evaluation. However, one of the objectives of an evaluation is to prove its significance in order to be
compared with other programmes or be adopted at large. Therefore, not only should the results of the
evaluation be promptly made available but the evaluator should describe in detail the methodology
used for the evaluation. A precise explanation of the methods is crucial to allow for their replication in
other studies. If feasible, the evaluator should benchmark the outcomes of the programme with the
results of earlier studies on similar initiatives. All results should be reported, not only those that
provide evidence of a positive impact of the programme on behaviour. Knowing what is not effective
can be as important as knowing what is effective. Results should be made available to any interested
parties. For example, an evaluation study could be uploaded to the website of the organisation or
agency that conducted the programme. The organisation could also share its report of the initiative
with local, national, or international clearinghouses for financial education, such as the IGFE. The
evaluation study should reach as many people as possible in order to share with other agencies the
findings of the initiatives and allow other financial education providers and evaluators to build on
previous knowledge and experiences.
Finally, the evaluation must follow proper guidelines to protect the rights of participants. Data
confidentiality, proper disclosure, and securing privacy are not only necessary requirements but are
also important requisites to limit attrition biases. Also, participation in the programme has to remain
voluntary and evaluators have to think hard about the potential ethical issues of treating groups
differently.
7. Conclusions
In this chapter a five-tier framework has been presented and discussed that is directly applicable
to different types of financial education programmes. The framework is a simple guideline that
financial educators can follow when designing evaluation studies. While leaving significant flexibility
to the evaluators, the framework provides a high degree of standardisation, which will allow
programmes to be compared both nationally and internationally.
Evaluators have the responsibility to follow the framework and apply it to their programmes in
the most effective way. Their diligence in doing so will lead to progressively deeper insights into
which methods are the most effective in assessing the impacts of financial education programmes, and
perhaps even lead to the creation of novel evaluation methods. Therefore, the five-tier framework is
just the starting point, a compass for policy makers and educators in the field.
The debate about financial education programmes and evaluation methods is far from over. The
continued discussion and interaction among scholars, evaluators, and policy makers is necessary to
enrich and improve upon the existing evaluation studies. Further efforts are needed to apply the fiveIMPROVING FINANCIAL EDUCATION EFFICIENCY: OECD-BANK OF ITALY SYMPOSIUM ON FINANCIAL LITERACY © OECD 2011
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tier framework to as many programmes as possible in order to assess the effectiveness of different
initiatives and collect information on the needs of specific groups of citizens. In this way policy
makers and private organisations will be able to tailor financial initiatives to specific needs, using the
most effective methods. And the OECD can become an important resource by creating a supporting
structure for all policy makers and financial educators.
The interest raised by financial education initiatives in many countries underlines the importance
of financial literacy and its link to financial well-being. Financial education is increasingly becoming a
priority among policy makers and private institutions in countries around the world. It is therefore
important for institutions like the OECD to facilitate discussion and sharing of ideas among its
members.
Notes
1
See OECD (2005).
2
I borrowed this definition from Collins and O’Rourke (2009), who used it to refer to those experiments
that simply administer a pre-post survey to assess the outcomes of the program.
3
See O’Connell (2009) for detailed explanation of this framework.
References
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Collins, J. M., O’Rourke, C. (2009), “Still holding out promise: a review of financial literacy
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Fox, J. J., and Bartholomae S. (2008), “Financial education and program evaluation” in Xiao J. J. (ed.)
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Utkus (eds.), Pension Design and Structure. New Lessons from Behavioral Finance, New York:
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Lusardi, A. (2008), “Introduction,” in A. Lusardi (ed). “Overcoming the Saving Slump: How to
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Lusardi, A. (2009), “U.S. Household Savings Behaviour: The Role of Financial Literacy, Information
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Lusardi, A., P. Keller, and A. Keller (2008), “New Ways to Make People Save: A Social Marketing
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O’Connell, A. (2009), “Evaluating the effectiveness of financial education programmes” working
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Part II
Behavioural Economics and Financial Education
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Chapter 3
Can Behavioural Economics be used
to make Financial Education more Effective?
by
Joanne Yoong*
This chapter investigates the extent to which behavioural economics might explain some of the
problematic financial behaviours that are observed amongst consumers, including low levels of
retirement saving and high levels of credit use. It also asks how behavioural economics can help
policy makers to improve financial education, from take-up to completion.
Various tools available to policy makers to help consumers overcome psychological constraints
are discussed. These include supervision and regulation of financial services, and the design of default
options.
*
Associate Economist, RAND Corporation, USA.
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1. Introduction
Over the past few decades, trends in the financial markets as well as pension system reforms in
many countries have expanded consumers’ role in determining their own long-term economic security.
At the same time, policy makers around the world have also become increasingly aware that many
ordinary consumers are not necessarily able to shoulder this responsibility. Increasing financial
literacy via financial education has long been regarded as the intuitive solution. Yet, the actual impact
of various financial education programmes on knowledge and behaviour has only recently begun to be
rigorously studied. The mixed results to date clearly suggest that successful financial education is a
challenge not to be taken lightly.
Drawing on psychology and cognitive science, the rapidly growing field of behavioural
economics suggests that financial decision making, as well as other types of behaviour, may be driven
by systematic biases and heuristics beyond the scope of purely rational decision making. For policy
makers, behavioural economics offers a new perspective on individual decision making and consumer
protection, and increasingly features as a topic of dialogues around the world.
The goal of this chapter is to explore ways in which insights from the emerging field of
behavioural economics can make financial education more effective. Sections 2 and 3 provide a
relatively brief and non-technical selective review on financial education and behavioural economics
to draw together much of the important work related to topics of household finance. Sections 4 and 5
discuss approaches to applying behavioural economics to the development and implementation of
financial education programmes, as well as other policy tools related to consumer protection that
complement financial education. Section 6 concludes.
Scope and Definitions
As a note to the reader, this chapter will focus on household financial decisions. Related topics
such as entrepreneurship and business education are of significant interest but fall outside the scope of
this discussion. In addition, it largely draws on evidence and experiences from OECD member
countries, but also refers to other international settings when appropriate.
For the purposes of this chapter, it is useful to explicitly define certain terms that will be used
throughout. As in OECD (2005), we define financial education as the process by which financial
consumers improve their understanding of financial products, concepts and risks and, through
information, instruction and/or objective advice, develop the skills and confidence to become more
aware of financial risks and opportunities, to make informed choices, to know where to go for help, and
to take other effective actions to improve their financial well-being. In this context, information involves
providing consumers with facts, data and specific knowledge to make them aware of financial
opportunities. Instruction involves ensuring that individuals acquire the skills and ability to understand
financial terms and concepts through the provision of training and guidance. Advice involves providing
consumers with counsel about generic financial issues and product so that they can make the best use of
the financial information and instruction that they have received. We also define a financial education
programme as a project or service (or a related collection of projects and services) that is systematically
structured with the intention of meeting specific financial education goals.
We define consumer protection as overlapping with but distinct from financial education. The
emphasis of consumer protection is legislation and regulation to enforce information disclosure and
standards of practice by financial institutions (that may include financial education), as well as
mechanisms for consumer complaint and redress in the case of unfair, deceptive or fraudulent
practices.
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2. Background and context
Why is financial education potentially so important?
When compared to several decades ago, the financial environment for the average consumer
today offers more opportunities for the individual to control his or her own finances. As a result of
improved technology and financial innovation, consumers have experienced an unprecedented
expansion of access to a growing array of sophisticated products and services (Dynan, 2009).
However, the complexity of the financial marketplace has introduced new pitfalls for the investor as
well as greater potential for financial fraud and mismanagement. At the same time, there has been a
transfer of financial responsibility away from states and firms towards households, firstly through the
decline of public welfare policies and corporate social programmes, and secondly through the shift
from defined-benefit to defined-contribution public and private pension schemes (OECD, 2005). The
burden on households is even more significant in the light of growing life expectancy and long-term
health care costs. Finally, these trends have distributional implications: if only the wealthy and welleducated have the financial skills to take advantage of these changes, the poor may disproportionately
lose more than they gain, exacerbating existing inequalities in wealth and well-being.
Given these challenges, consumers’ ability to make intelligent and responsible short and longterm financial decisions is more critical than ever. Financial education that effectively supports this
ability has potential benefits for multiple stakeholders. For consumers, there is strong evidence that
links more financial literacy to welfare-improving behaviour - more planning, more appropriate use of
credit, more successful wealth accumulation lead to more successful financial well-being, which in
turn is linked to greater long-term overall well-being. For the financial services industry, more
participation and better-informed participants would increase demand for financial products, build
competitiveness, promote market transparency and increase efficiency. Policy makers would benefit
from a lighter regulatory and supervisory burden related to monitoring, intervention and redress in
financial markets as well as a more successful environment for reforms. For the economy as a whole,
more financially-secure households with higher savings rates should contribute to better-functioning
markets, increased economic stability and development and a reduced need for future public
expenditures.
Financial literacy among OECD member countries
An increasing number of countries have completed or are currently in the process of
implementing financial literacy or capability surveys, helping policy makers to assess the baseline
need for financial education at a population level. In 2005, the OECD (2005) first reviewed the
surveys in 12 of its member countries. Since then, a number of new national surveys have been
conducted and in October 2008, the OECD established the Financial Literacy Measurement Sub-group
to address the need for internationally comparable survey data on financial literacy and capability.
Over time, a surprising number of common policy-relevant themes have emerged
Firstly, a significant fraction of consumers have a limited objective understanding of financial
issues or financial capability. For instance, in the recent 2009 United States National Study of
Financial Capability, less than 10% of respondents were able to answer three simple questions about
compound interest, inflation and risk diversification correctly (FINRA, 2009, Lusardi, 2010). In the
United Kingdom, more than 60% of respondents were identified as having at least one area of
weakness related to financial capability (Atkinson et al, 2006)
Secondly, at the same time, many consumers may still be overly confident about their ability to
manage their finances: in a typical example, in the same 2009 United States Financial Capability
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survey, almost 40% of individuals rated their knowledge as high or very high. This high self-ranking is
consistent with findings from other surveys, but incompatible with the measured level of financial
literacy (Lusardi, 2010). Similarly, in the Netherlands, almost 15% of individuals had poor financial
knowledge but report that they have no need for extra information about financial matters (Cent1Q,
2007)
Finally, important patterns of intra-national disparity in financial literacy exist. Financial literacy
is consistently correlated with education and income: the surveys persistently show that those with
lower income and education exhibited the least knowledge.
Although very general, these findings clearly suggest a need for financial education. Importantly,
they also draw attention to the need for design that goes beyond the simple presentation of facts and
figures. Programmes need to take into account the requirements, interests and baseline skills of
different target populations in mind in order to engage and motivate the consumer, while maintaining a
delicate balance between increasing self-efficacy and creating potentially harmful overconfidence. In
the implementation of any given programme, these and other challenges have not been easy to
overcome, as the next section illustrates.
Financial Education in the OECD and beyond
Many governments and supervisory authorities in the OECD have a statutory objective of
promoting public understanding of financial products and markets, with financial education as a
central part of their efforts. For example, in the UK, the Financial Services Authority launched a
programme called “Building Financial Capability” in 2003, headed by a public-private steering
committee to improve overall financial education. In the United States, The Department of the
Treasury established the Office of Financial Education in 2002 to promote access to financial
education tools. It also coordinates the efforts of the Financial Literacy and Education Commission, a
group composed of representatives from 20 federal departments, agencies and commissions. In Japan,
France and the Netherlands, committees that bridge both the public and private sector have also been
formed to provide national-level guidance on financial education (OECD, 2008).
Training consumers in financial matters is by no means new or unpopular, as shown by the large
number of existing financial education programmes conducted by schools, employers, governments
and other organisations. In its first major international survey of financial education programmes, the
OECD (2005) found that three key subject areas stand out (and will be the focus of many of our
examples to follow):
Firstly, given the shift towards defined-contribution plans and pension reform in many countries,
programmes related to savings and investment for retirement are increasingly important. These
primarily consist of education programmes provided by the public sector or consumer advocates as
well as public education campaigns to encourage saving.
Secondly, the number of consumers in the OECD with mortgage credit has increased primarily as
a result of low interest rates, rising house prices and deregulation. Credit card usage has also grown
substantially over the last several decades mainly as a result of product innovation. In response to the
increase in household debt, programmes focused on credit and debt have also increased in the last few
decades. These include both preventive credit-management education as well as programmes targeted
at consumers in need of credit repair.
Thirdly, as financial markets gain in sophistication, a surprisingly large proportion of consumers
remain excluded from the financial mainstream. For instance, in 2009, approximately 25% of the
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population in the United States were “unbanked” or “underbanked”, i.e. either having to rely on
alternative financial services or lacking a bank account altogether. The poor, less-educated and certain
minorities are disproportionately represented among this group (FDIC, 2009). While large financial
institutions are often not aggressive in marketing to such consumers, lack of understanding of how to
obtain an account and the benefits of having an account also form an important barrier to participation.
A number of programmes focus on financial inclusion, in order to help the poor increase their savings
and avoid expensive and sometimes exploitative alternative financial services.
In the period following this initial survey, financial literacy programmes have continued to grow
and evolve. In 2007, a survey of the EU27 member states by the consulting firm Evers and Jung found
over 150 financial literacy initiatives, with an increasing focus on the use of internet delivery
(Habschick et al, 2007). In 2008, the OECD (2008) released a study reviewing financial education
programmes related to insurance and private pensions that also reflected an expansion among member
countries as well as more use of websites and internet tools. In the wake of the financial crisis, several
countries have intensified existing programmes, or instituted new ones, to address the adverse effects
on households.
However, the substantial variance in the specific form, content and delivery of these programmes
emphasises the fact that while the concept and topics may be general, financial education itself far from
being a generic intervention. Most of the (non-school based) programmes reviewed relied on traditional
print media and the internet as primary forms of dissemination. More costly methods such as face-to-face
interaction were less frequently used, depending on the context: for instance, programmes that target the
unbanked primarily rely on training courses and less frequently on internet delivery.
Despite this seeming abundance and diversity, critics argue that no strong evidence exists to show
the effectiveness of financial education. Seminal studies in the early research literature on financial
education in schools and workplaces found positive and statistically significant effects on individual
financial behaviour (Bayer et al. (2009); Bernheim et al. (2001, 2003)).
However, as evaluation has become more widespread, the evidence base has grown to include
results from a growing number of different programmes. The sum of findings to date is also decidedly
more mixed. There is much support for the view that financial education programmes can positively
affect financial knowledge and expressed intent to adopt desirable financial behaviour (see for
instance, Braunstein and Welch (2002) and Martin (2007) for a general review of findings drawn from
the United States). In a related but separate literature, multiple studies have convincingly linked
financial knowledge to such behaviour (Lusardi and Mitchell, 2007, 2009; Lusardi, 2008; Lusardi and
Tufano, 2009; van Rooij et al, 2009).
However, few studies have been able to actively demonstrate a compelling and direct relationship
between financial education and behavioural change. The evaluation of a retirement savings seminar
by Clark et al. (2006) is an illustrative example: while respondents reported changing goals and
intentions to save immediately after the seminar, a follow-up survey found only weak links between
these intentions and actual changes. In addition, even when effects are present, their magnitude may
be relatively small compared to estimates of the effect size from other factors, such as peer effects
(Duflo and Saez, 2003) or psychological responses to features of the choice environment (to be
discussed in Section 3).
In the absence of unambiguous supporting evidence in favour of financial education, some have
argued that financial education does not “work”, advocating instead more paternalistic interventions.
More emphatic critics further argue that financial education may even be counterproductive, as false
confidence or feelings of guilt generated by programmes may themselves be detrimental (Willis, 2008).
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The current lack of conclusive results may partly be attributed both to the variety of programmes
as well as the state of systematic evaluation. Firstly, the chain of relationships linking education and
behavioural change is complex, involving a progression that is not necessarily linear from education to
knowledge and motivation, intentions, and finally actual behavioural change. Many programmes are
designed with fairly modest aims of addressing only one part of this chain, and expectations for
individual programmes should therefore be benchmarked against their intended scope (Lyons et al.,
2006). Lusardi (2008b) notes that it is hardly surprising to find that one retirement seminar does little
to change behaviour, or that widespread financial illiteracy cannot be cured by a one-time benefit fair;
whereas evidence shows that programmes with a sustained series of education sessions can be
effective in stimulating saving. Secondly, true impact evaluation is still often not performed,
particularly in circumstances where either the scope or the budget of the programme is limited. Very
often, managers lack the financial and human resources to track behavioural change or even to
rigorously measure skills acquisition, and are able to at best monitor delivery outcomes or customer
satisfaction (Lyons et al. 2006). At this stage, rigorous large-scale meta-analysis of interventions
across programme types and settings remains largely infeasible.
Indeed, given that financial education is not a generic intervention, the question of whether
financial education as a whole works or not is inherently ill-posed. Like many other policy
instruments, financial education should not be regarded as a silver bullet, and much depends on the
specifics of each programme. When poorly implemented, it can be wasteful, ineffectual or even
counterproductive; however, in many settings, it is appropriate and useful. As a practical matter, the
overwhelming concern for many policy makers and practitioners relates to what works best: when
financial education is part of an overall solution, how can it be made most effective?
3. Behavioural economics and personal finance
Under the standard assumptions of economic theory, decision makers are perfectly rational and
able to fully utilise all the information available. They make optimal choices that maximise the
expected value of their private utility, based on preferences that are consistent across time and
independent of context. While these assumptions are far from approaching the reality of everyday
human beings, economists have long argued that they were never meant to do so - rather, they provide
mathematically tractable and empirically reasonable approximations for the modelling and analysis of
actual behaviour.
A growing body of evidence across multiple domains of observed behaviour, however, suggests
that this rationale does not always hold true - we find systematic biases and anomalies as well as
common decision making heuristics that contradict the predictions of models populated solely by
homo economicus. The emerging field of behavioural economics draws on insights from psychology
and cognitive scientists to study aspects of behaviour in various market settings that deviate from these
standard assumptions.
In this section, we provide a review of key concepts and terms currently used in behavioural
economics. For clarity and structure, we employ the taxonomy used by DellaVigna (2009), who
considers three broad categories of anomalies or deviations from the standard model, namely nonstandard preferences, non-standard beliefs and non-standard decision making processes. In each case,
we provide illustrative (but certainly not exhaustive) examples from the empirical research literature
relevant to personal finance (specifically, money management and household expenses; consumer
credit; real estate; savings and investments; insurance and annuitisation), drawing as far as possible on
research based on demonstrations in the field rather than the laboratory.
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Nonstandard Preferences
Time inconsistency
As a first point of departure from the standard model, consider that individual preferences may
not be stable, but instead change over time - for instance, the same person may have different shortand long-run discount rates. Such time-inconsistency implies that this decision maker will have
different preferences over the same future plan at different points in time.
A particularly familiar form of this phenomenon is hyperbolic discounting, or the tendency to
discount the future more steeply in the immediate rather than the distant future (Laibson,1997;
O’Donoghue and Rabin,1999). This can result in present-bias and problems with self-control,
especially when presented with a course of action with large delayed benefits but small short-term
costs. Hyperbolic discounters may sincerely wish to achieve certain long-term welfare-improving
goals (becoming a regular at the gym, losing weight on a steady diet or keeping to a budget), but
constantly risk being overwhelmed by the need for immediate gratification.
Individuals who are aware of their own proclivities may seek out commitment devices to
constrain their future selves (Laibson, 1997). On the other hand, naive present-biased individuals are
likely to overestimate their ability to resist temptation and underestimate their own inertia, leading to
procrastination over unpleasant decisions (O’Donoghue and Rabin, 2001).
Models that incorporate time-inconsistency, self-control problems and procrastination can explain
many undesirable aspects of financial behaviour, particularly in the context of saving for retirement.
Self-control problems provide an intuitively appealing explanation for persistent individual
undersaving (Laibson et. al. 1998). Such models can also explain more complicated puzzles. For
instance, households in the United States tend to incur high-interest credit-card borrowing while
simultaneously accumulating low-returning retirement assets. Laibson et al. (2007) suggest that
individuals’ short-term impatience leads them tend to spend liquid assets and use credit cards, but they
then knowingly commit themselves to building long-term wealth by investing in illiquid assets.
Saving for retirement. A strong implication of time-inconsistency is that relatively small
transaction costs or burdensome paperwork can be a real barrier to action, including participation in
retirement savings plans (Choi et al. 2002). In the United States, Madrian and Shea (2001) find that an
individual's participation and allocation of contributions is highly sensitive to enrolment defaults.
Subsequent research by Choi, Laibson, Madrian, and Metrick (2004) shows that individuals
consistently follow the path of least resistance and/or procrastinate when making such decisions.
Cronqvist and Taylor (2004) find similar evidence for the default effect in Sweden.
Credit and Borrowing. Individuals who have self-control problems may also be particularly
susceptible to over borrowing, whether from mainstream providers or alternative financial providers.
Meier and Sprenger (2010), for instance, show that present-bias is positively related to increased
credit-card borrowing. Individuals’ naivete about their problems may further compound poor credit
management. Earlier research by Ausubel (1999) shows that people will choose a credit card with
lower short term “teaser” interest rates and higher long-term rates over the opposite, as they naively
believe that they will not borrow much on a credit card, past the teaser period. Skiba and Tobacman
(2008) examine default data from a payday lender in the United States and finds that the average
defaulter has already repaid 90% of their original loan principal. This finding suggests that payday
loan customers borrow in the short-term expecting to borrow less in the future. However, instead of
rationally defaulting earlier to avoid paying the large interest costs of the loan, they then procrastinate
on defaulting, which can have monetary, time or stigma costs.
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Reference-dependence
Another departure from the standard model relates to reference-dependence, or the perception of
value in relative rather than in absolute terms. When this is the case, the presentation or framing of
choices becomes critically important, as preferences may be reversed when the same problem is
framed in different ways.
In prospect theory, Kahneman and Tversky (1979) suggest that individuals derive utility from
wealth based on differences from a given reference point rather than its absolute value. In particular,
individuals tend to view gains and losses differently: those who are loss-averse weight the negative
utility of losses more than the positive utility from the same amount of gain. A related manifestation of
reference-dependence is the endowment effect (Kahneman et al, 1991), which leads individuals to
value of objects that they are endowed more than their actual willingness to pay for the same object. In
combination, loss aversion and the endowment effect can result in status quo bias, or an inherent
preference for one’s current state.
Another form of reference-dependence is as follows: in standard economic models, individuals
evaluate decisions in the context of all other decisions that they face, and the utility of a particular
decision is derived only indirectly via its impact on total wealth. Narrow framing refers to the
tendency to treat the outcome of decisions in isolation. Thaler (1985, 1999) and Shefrin (1988)
describe a series of cognitive processes that embody reference-dependence called mental accounting:
individuals organise, evaluate and keep track of financial activities in a manner analogous to real
accounting systems. Sources and uses of funds tend to be grouped using categories (housing, food, etc)
with implicit or explicit budgets, and balancing of these “mental accounts” may take place at particular
intervals.
Loss Aversion in the Housing Market. In a study of the housing market in Boston, Genesove and
Mayer (2001) find that sellers tend to be loss averse. Their purchase price is a highly-salient reference
point, resulting in list prices for units that are too high for units predicted to sell at a loss.
Selling Winners and Holding Losers. The trading behaviour of individual investors in the stock
market is consistent with loss-aversion, generating anomalies such as the disposition effect: investors
who find it unpleasant to realise losses have a tendency to sell winners and hold on to losing stocks
(e.g. Grinblatt, 2001, Shefrin,1985, Odean 1998; Barber, Odean and Zhu (2009)).
Myopic Loss Aversion in the Stock Market. When investors are loss averse and also tend to
evaluate their portfolios very frequently, this combination can lead to an excessive tendency to avoid
taking risks, or myopic loss aversion (Thaler et al 1997, Gneezy, Kapteyn and Potters, 2003). Myopia,
in this context, refers to an inappropriate treatment of the time dimension. For example, bad news
from one day to the next (“the market value of an investment fell since yesterday”) is treated in the
same way as bad news referring to a longer period (“the market value of an investment fell since last
year”). Benartzi et al. (1997), Gneezy and Potters (1997) and Gneezy, et al. (2003) show that, for
investors in the U.S. and Holland, the more frequently investors receive information, the more risk
averse they become. Investors who are myopic may sell out of risky assets too quickly in a downturn
and buy back in too late in a recovery, resulting in permanent losses that could have been avoided by a
longer-term perspective. Benartzi and Thaler (1995) posit that the large premium required by
investors with myopic loss aversion may be able to account for the equity premium puzzle.
Overinsuring Small Risks. Loss aversion can have important implications in an insurance setting.
Consumers who are loss averse may overinsure small risks, where the expected value of the loss is
small relative to the cost of the insurance (e.g. mobile telephone equipment insurance, or insurance
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bundled with ticket sales that covers cancellation of the event). Sydnor (forthcoming) shows that the
premiums paid for such insurance schemes are puzzling in the context of the standard model but can
be explained by a combination of loss aversion and overweighting of loss probabilities.
Narrow Framing in the Stock Market. One form of narrow framing is the tendency to treat new
gambles and other risky decisions as if utility comes directly from the gamble itself, rather than
considering the gamble in the context of all other risks currently faced by the individual. In the stock
market, Barberis, Huang and Thaler (2006) find that investors with a diversified portfolio appear to
derive utility from the fluctuations in their stock investments, independent of the overall fluctuation of
their entire wealth portfolio.
Mental Accounting in Household Financial Planning. In overall financial management and
planning, when households have multiple financial accounts, funds are often not “fungible” even
within households or individuals. In the context of retirement savings plans in the United States, Card
and Ransom (2007) find that individuals treat their own savings and employer or government
contributions as if they are coming from different mental accounts. Choi et al. (2009) show that
individuals tend to make decisions about one investment account without considering the allocations
in their other accounts. As a result, framing matters: Benartzi and Thaler (2002) find that the choice of
retirement savings portfolios varies significantly when portfolio choices are re-framed in terms of
ultimate outcomes (i.e. projected retirement income).
Saving Out of Tax Refunds. Lump-sum transfers may be easier to save because individuals
account for these funds differently from regular income flows, seeing them as surplus or bonus funds
that can be saved (Shefrin and Thaler, 1988; Thaler, 1994). Research on the uses of refunds from the
Earned Income Tax Credit in the United States has found that many recipients either save a portion of
their refund or use refund dollars to purchase relatively expensive durable goods such as appliances or
autos (Tufano and Schneider, 2008)
Framing and the Demand for Annuitisation. While rational models of risk-averse consumers
have difficulty explaining limited annuity demand, Brown (2007) and Brown et al (2008) propose an
alternative view based on framing. When consumers think in terms of consumption, annuities are seen
as valuable insurance, whereas when consumers think in terms of investment risk and return, the
annuity is perceived as a risky asset because the payoff depends on an uncertain date of death. Brown
et al (2008) show individuals prefer an annuity over alternative products when the question is framed
in terms of consumption, but the reverse is true when information is presented in terms of risk and
return.
Social preferences
Preferences can also be defined over interactions with others in several ways. Researchers have
found that the savings and investment decisions of community members and peers have a causal effect
on individual savings and investment decisions, through direct social interactions such as
straightforward word of mouth or learning by observation (e.g. Brown et al, 2008c; Duflo and Saez,
2003; Grinblatt, 2001b; Hong et al, 2004). In addition, direct or indirect social pressure (such as the
implicit desire for conformity, acceptability and social identity) can powerfully affect decision making
(Bikhchandani et al, 1998). In a striking experiment, Benjamin et al (2010) find that when ethnic
identity is salient, people tend to conform to ethnic types when making risky choices. Finally,
individuals may also have strong preferences over socially-defined values such as altruism, reciprocity
and inequity. For instance, altruistic individuals may derive utility - the warm glow effect - directly
from the utility of others (see Fehr and Schmidt (2006) for a detailed review of this literature).
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Social interactions in stock market investing. In investing, effects of social interactions have
been found in remarkably varied settings. Hong, Kubik and Stein (2005) find that U.S. households
with high social interactions more likely to invest in the stock market than non-social households.
Brown et al (2008) also show a causal relation between an individual's stock ownership and average
community stock market participation (and further show that the results are stronger in more sociable
communities). Using data from 10 European countries, Christelis, Jappelli and Padula (2005) find that
social interactions significantly affect stockownership (especially in Mediterranean countries). In
China, Ng and Wu (2006) also document strong word of mouth effects in trading decisions.
Taxpayer Compliance. The behavioural aspects of tax paying behaviour are not well understood,
but studies suggest that factors internal to taxpayers such as social values may be key drivers of
compliance (IRS, 2009). Increasing efforts on the part of agencies such as Her Majesty’s Revenue and
Customs (HMRC) and the United States Internal Revenue Service (IRS) are focusing on research
exploring the consumer perspective, including the importance of these behavioural factors.
Charitable giving. Della Vigna et al. (2010) study the relative roles of social pressure and
altruism in the context of charitable giving. They find that early notification about a door-to-door
fundraising drive and the provision of a “do not disturb” option results in a significant reduction of
household willingness to entertain fundraisers and the amount of donations respectively, and conclude
that social pressure is an important determinant of charitable giving.
Non-standard beliefs
Overconfidence and over-optimism
Two aspects of overconfidence are particularly relevant to household finance: overconfidence
about one’s own inherent ability and over-optimism about the environment. In the first case, we
observe that individual self-assessment generally tends towards overestimation about ones own
abilities. A classic demonstration comes from Svenson (1981), who finds that when asked to rate their
own skills, 80% of all drivers consider themselves in the top 30% of the population. Many financial
literacy surveys, as discussed previously, display this trend towards overconfidence. DellaVigna and
Malmendier (2004, 2006) show that consumers who are overconfident about their ability to maintain
certain behaviours may be more susceptible to exploitation. In the second case, individuals also tend to
be overconfident about their environment. In particular, they tend to consistently underestimate the
probability of negative events across multiple domains (e.g. natural disasters, hospitalisation or falls in
stock prices (Barberis and Thaler,2003)) Both types of overconfidence can lead to excessive risktaking or other mistaken decisions (Camerer and Lovallo, 1996).
Overconfidence in ability to trade in the stock market. Investors may be overconfident in their
own abilities, and hence tend to trade overly aggressively, which can eventually lead to portfolio
losses (e.g. Odean, 1998; Barber and Odean 2001, Grinblatt 2009, Barber et al 2009). Notably,
overconfidence in this setting is associated with gender: the Barber and Odean (2001) study found
that, all else equal, men traded almost 50% more than women, driving up their transaction costs and
lowering their returns. Recent data from the field provides some support for this finding: data on
almost 3 million Vanguard investors shows that during the stock market crisis of 2008 and 2009, men
were 10% more likely to abandon stocks than women (potentially implying that men were more likely
to have taken losses and missed the markets initial rally) (Ameriks et al, 2009).
Overconfidence in employers and advisors. Overconfidence about the abilities or motives of
others can also be detrimental. For instance, when investing as individuals, Benartzi, Thaler, Utkus
and Sunstein (2007) show that employees tend to be overconfident about the performance of their
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employer, which can lead them to hold a large percentage of savings in their employers stock or stock
options which has negative implications for overall household risk diversification (Oyer and Schaefer
2005, Cowgill et al., 2008). Malmendier and Shanthikumar (2007) show that small investors are more
naive about incentives than large institutional investors: they tend to respond literally to security
analyst recommendations, while large investors tend to discount stock recommendations from
potentially biased sources.
Overoptimism about insurance needs. Research shows that in many countries, homeowners are not
sufficiently against disaster risk. In addition to underestimating the probability of such events,
households often underestimate damages caused or needs for resources stemming from potential
disasters and thus their coverage needs, in particular, those related to large-scale catastrophes or ageing
risks. This is often compounded by a general but potentially unfounded conviction that other entities
such as the Government already covers the risk or will eventually cover damages (for example, in the
event of natural disasters or terrorist attacks) – the so-called “Samaritan dilemma” (OECD, 2008).
Non-standard probabilistic thinking
Researchers in psychology and decision science have shown that individuals have difficulty
formulating accurate beliefs about risk, particularly in the form of numerical probabilities. One common
tendency is to overweight immediately-available information and to draw false conclusions about how
accurately that information represents the underlying reality. Availability and representativeness
heuristics can manifest in many ways. “Gamblers fallacy” is the belief that the next draw of a signal will
be different from the previous one: for instance, roulette players may bet on red after observing a string
of black squares come up; or individuals with two boy children may suppose that the next time, they are
more likely to have a girl. In either case, however, the probability of either one of the two outcomes is
equal and independent with every draw. The somewhat opposite manifestation is over-inference or the
belief that a sequence of signals is likely to mean the next signal is of the same type.
Overinference about past stock returns. When investing in the stock market, naive investors may
tend to place too much weight on past performance, consistent with the expectation that past high
returns from an investment results in high future performance and vice versa. Multiple studies
demonstrate that investors tend to over-extrapolate based on past performance (e.g., Benartzi, 1995;
DeBondt and Thaler 1985). Overinferring the value of strong past performance of stocks can result in
investment decisions in portfolios that perform worse than average because they are skewed towards
stocks that are overpriced and will therefore under-perform (De Bondt and Thaler 1985). While in
some contexts past performance may be informative (such as actively-managed investment funds),
Choi et al (2010) show that even when comparing essentially identical index funds, individuals are
sensitive to information about past returns since inception.
Inappropriate insurance purchasing behaviour. Alternatively, individuals who do not observe
certain events such as earthquakes or accidents may form unrealistically high expectations that such an
event will not happen. On the other hand, when personally exposed to rare events, many individuals
tend to then overestimate the probability of such an event happening. Insurance purchasing behaviour
tends to display some of these biases. For example, the 9/11 attacks increased awareness of the risk of
terrorism in OECD countries and of the need to develop adequate coverage, and sales of all types of
protection insurance increased in the two years afterwards (OECD, 2008).
Over-participation in lotteries. Lotteries are attractive to many individuals who have a tendency
to overweight small probabilities. The appeal of a potentially large expected future payoff in this case
for a relatively small outlay can also be influenced by the combination of myopic decision making and
the underweighting of small dollar amounts (Haisley et al., 2008a).
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Non-standard decision-making
Although individuals may have preferences or beliefs that are consistent with the standard
economic models, their observed behaviour may still diverge if their actual decision-making processes
depart considerably from rational utility maximisation.
Limited Attention
One important hypothesis is that attention itself may be a scarce resource: individuals
fundamentally may not have the cognitive capacity to process all the information in their environment
simultaneously. Limited attention can lead to decision making that is disproportionately affected by
the saliency and recency of information and stimuli. Limited attention can also affect the selective
filtering of information, due to confirmatory bias, or the tendency to gather and retain information that
reinforces already-held priors (Mullainathan and Shleifer, 2005). It implies that individuals
compensate for their processing constraints by adopting simplifying heuristics or cognitive “rules of
thumb” for managing complex information or problems.
Limited attention also means that providing helpful information to consumers is not always
straightforward: when the limits of cognitive capacity are reached, individuals may be susceptible to
information overload. Too much information in this case may lead to a worsening of cognitive
performance on specific tasks and feelings of stress. Finally, in the extreme case when individuals are
faced with a choice that is perceived as too complicated, they may simply default to choice avoidance,
or the decision to refrain from choosing any option at all. In other words, too much information, too
many choices or a badly designed choice architecture may thwart choice altogether.
Limited Awareness of Financial Product Fees and Expenses. The average consumer of
financial products reports being unfamiliar with fees and expenses, even with respect to his or her own
portfolio (Dominitz, Hung and Yoong, 2009). However, over the long-term, even small fees can
significantly erode long-term value. Barber, Odean and Zheng (2005) find that mutual fund purchases
are sensitive to salient fees, such as front-end loads and brokerage commissions but are insensitive to
less salient charges such as expense ratios. The saliency effect also plays a role in credit card fee
payments (Agarwal et al. 2008). Some credit card users do in fact learn to lower their fees the longer
they own credit cards, but this effect is offset by the tendency to forget fees. A late payment charge
from the previous month is much more influential than the same payment from one year prior.
Limited Awareness of Taxes. The National Tax Advocate Annual Report 2009 for the United
States notes that the complexity of the United States tax code is the most serious problem facing
taxpayers and the United States Internal Revenue Service (IRS) alike. U.S. taxpayers and businesses
spend about 7.6 billion hours a year complying with the filing requirements of the Internal Revenue
Code, effectively making the “tax industry” one of the largest industries in the United States (IRS,
2009). Ignorance of the correct tax implications of their economic activities or confusion regarding tax
returns may result in suboptimal withholding and investments, and delays or avoidance of filing
altogether. As a further result of this complexity, many individuals may not be sensitive to tax
incentives and penalties when making financial decisions. Barber and Odean (2004) find that while
investors do show some response to tax incentives, many investors fail to employ fully tax-optimal
strategies. Similarly, Chetty et al (2009) show that in the context of sales taxes, consumers are not
usually attentive to non-salient taxation: firstly, posting tax-inclusive price tags reduces demand and
secondly, taxes included in posted prices reduce demand more than taxes applied at the point of
purchase.
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Limited Investor Attention in the Stock Markets. Barber and Odean (2008) show that investors
are net buyers of salient companies; investors prefer companies that performed unusually well or
poorly on the previous day. Hirshleifer, Lim and Teoh(2009) show that incorporation of financial
news slows when more news is available, while Della Vigna and Pollet(2007) show that investors do
not take into account the impact of long-term demographic changes when making their decisions.
Menu Effects in Investment Choices are many examples of menu effects - systematic behaviours
when individuals are presented with a list of choices - arise when choosing investments such as those
offered by a typical retirement savings plan or a regular mutual fund company. One of the most wellknown examples is the “1/n heuristic” described by Benartzi and Thaler (2001), which results in the
naive diversification of portfolios. If investors are offered n choices, then they tend to allocate 1/n of
their investment to each of the choices offered, independent of the risk characteristics of each option.
Even when more sophisticated investors choose a subset of the menu of investment options, they tend
to apply a conditional version of the rule and split their allocation evenly across that subset (Huberman
and Jiang, 2006)
Investment Choice in Pension Plans. In DC plans, the breadth and flexibility of plan offerings is
important to ensure that participants are able to meet their individual needs. However, while giving
individuals more choices in theory improves their welfare, in practice the complexity of these choices
can have adverse effects both on participation and investment allocations. Iyengar, Huberman and
Jiang (2008) and Choi et al (2006) show that participation tends to drop as the number of plan options
increases. Iyengar and Kamenica (2008) also show that increasing the number of options in a plan
affects behaviour by causing investors to reallocate towards low-risk, simpler options.
Emotions and Affect
As Shiv et al (2003) point out the neural systems that drive human emotions have evolved for
survival purposes, playing an adaptive role by speeding up decision-making in response to particular
automatic triggers. These naturally-occurring responses may be helpful in short-term situations where
quick responses are necessary or disruptive when longer-term perspectives should prevail. Emotion
can thus have both positive and negative effects on decision-making, depending on the context.
In the domain of financial decisions, specifically, seminal work by Loewenstein and co-authors
shows that the emotional state matters: individuals in a “hot” emotional state tend to respond more
viscerally. The nature of emotional disposition also matters: not only do people in good moods make
overly optimistic judgments (and conversely. Individuals often find it hard to forecast their behaviour
in different emotional states (see e.g. Loewenstein 1996; Rick 1998; Loewenstein and Lerner 2003;
Loewenstein and Rick, 2010)) and may also suffer from projection bias, systematically expecting their
future preferences to be too close to their present ones (Loewenstein et al, 2003). Finally,
emotional/affective reaction matters. Ackert et al (2003) suggests that affective assessments should be
thought of as cognitive representations of specific positive or negative states linked to a particular
stimulus by previous experience, and therefore, naturally, individuals are attracted to stimuli that give
rise to positive affective reactions. In both these cases, framing and marketing techniques can also
play a role in provoking emotional responses.
Preference for the familiar (home bias) in investments. Across countries, investors tend to
allocate a large percent of their assets to domestic equities (French and Poterba 1991), although this
may leave them under diversified. While this may reflect high costs of acquiring information, another
interpretation is that this phenomenon may be rooted in preference for the familiar.
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Advertising content for financial products. Bertrand et al. (2009) analyze the impact of
marketing techniques in a mail-order campaign targeting prospective loan customers of a large bank in
South Africa. They find that the effect of advertising is large, even relative to price effects.
Advertising content is more effective when it triggers an “intuitive” response (e.g. the use of appealing
photographs of female models, which changes the behaviour of men, but tellingly, not women) rather
than a “deliberative” response (e.g. concrete suggestions for the use of loan proceeds).
4. Applying behavioural economics to financial education
Many of these biases are highly robust across not only the realm of personal finance, but all
aspects of individual decision-making. This underscores the difficulty of changing consumer
behaviour, even when financial education interventions are able to improve levels of knowledge and
motivation. However, the findings of this body of research to financial education can yield insights
about how to translate programmes into practice (some of which in fact reflect closely the commonsense of policy makers and practitioners used to working with ground realities rather than the
assumptions of economic theory).
Take-up and completion
Voluntary participation in financial education programmes is often hard to achieve. Even after
participants are enrolled, many programmes see significant rates of attrition before completion. A
further concern is that individuals who are most in need of these programmes may also be most likely
to avoid taking up and completing programmes. For instance, those who are likely to procrastinate
with respect to the rest of their financial lives may also procrastinate when it comes to obtaining
financial education. Meier and Sprenger (2008) demonstrate that in fact, present-biased individuals
have more pathological financial behaviour, but are also least likely to sign up for financial education
programmes. Naive time-inconsistent consumers may also likewise sign up for financial education
programmes, but fail to attend regularly. Individuals with limited attention may also not perceive the
need for financial education as salient or immediate, particularly when competing with other pressures
in their daily life. Overconfident or over-optimistic consumers may believe that they are less in need
of financial education than is actually the case. On the other hand, consumers who are less financiallyliterate and anticipate the unpleasantness of information overload may deliberately avoid financial
education. Finally, individuals who are excluded from the financial mainstream for social or cultural
reasons may also selectively opt-out from participation.
Behavioural economics suggests that programmes should design their enrolment mechanisms to
take into account present-bias and time-inconsistency, and to reinforce individuals’ own commitment
to long-term goals of financial well-being. Research on building participation in retirement savings
plans has much to offer in this regard. When consumers are present-biased, reducing the monetary and
transactions costs of enrolment and participation is extremely important. Paperwork should be
minimised, and materials and classes should be offered in formats and locations that are easy to
access. In some settings (such as in the workplace), it may be possible to exploit inertia by using
defaults: participants could elect to opt-out rather than opt-in to financial education programmes.
Present-biased individuals may also disproportionately respond to relatively small, highly-salient cashincentives or service discounts conditional on enrolment and/or successful completion. To aid
hyperbolic individuals, commitment devices could be employed: enrolment could be offered in
advance, with a penalty for eventual noncompliance (such as a financial deposit to be returned at the
end of the programme).
Marketing and presentation matter. Financial education programmes should increase their
saliency and relevance to their target consumers, taking into account variation in preferences, limited
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attention and emotional responses. Programme “look-and-feel”, the vividness of promotional materials
and the general framing of the intervention itself are integral parts of the overall marketing strategy, all
of which should be designed with the likely target audience in mind. Decisions about marketing and
framing for a specific group should not be underestimated, as consumer responses to the same material
may vary significantly. For instance, younger individuals may be more present-biased, and hence
material targeted at the young may need to emphasise the immediate benefits of financial education.
Alternatively, loss-averse consumers may respond more strongly to loss-framed material that
highlights the negative consequences of financial mistakes. On the other hand, if such consequences
are too starkly portrayed, consumers with strong negative emotional responses may avoid
participation.
Timing is also key: programmes should exploit opportunities to offer education when the context
is especially salient (Rabin, 1998): “teachable moments” just prior to making key financial decisions,
recurrent events such as tax deadlines (April 15 in the United States), or periods such as the current
financial crisis.
Programmes should take into account the fact that consumers may not have rational perceptions
of their own need for financial education, or how much they stand to benefit. With overly-confident
consumers, some form of initial debiasing may increase take-up, for example, by offering a short quiz,
followed by the offer of financial education. Consumers with low confidence may respond better to
marketing that emphasises self-efficacy and a “can-do” message, as well as the reassurance that
financial education is within their reach. In general, programmes that are able to advertise tangible,
quantifiable benefits to participants may find more willing participants.
Finally, appealing to social preferences and peer effects may increase the appeal and take-up of
programmes. If substantially high, programmes could make known the number of individuals taking
part as a fraction of the target consumer’s demographic group, in an effort to build or reinforce social
norms. Programmes can also leverage social networking to increase visibility among a particular target
audience, by more traditional means such as offering incentives to “refer a friend” or where possible,
using newer options such as setting up groups on networking sites such as Facebook.
Content, delivery and knowledge retention
Successfully managing to induce participation is only the first step. Participants in financial
education programmes may not internalise the information provided for many reasons. Some may be
enrolled for other motives other than education and lack any intention to actually learn the material. In
other cases, mandatory participation may be the norm, for instance in schools or as a pre-condition for
receiving other financial benefits. However, when individuals are enrolled in a programme by fiat,
they may perceive education as intrusive and discount the information received (Hung and Yoong,
2010). Even when participation is voluntary, if programme material is inappropriate, consumers may
not engage with the subject, or could even respond counterproductively. For instance, low-income
immigrants may have very different financial access, economic relationships and social preferences
from the general population. Linguistic and cultural barriers may prevail: they may find financial
discussions about irrelevant topics of no use at best or, worse still, alienating. In another instance,
individuals who are more sophisticated may perceive overly simple material as boring and are likely to
become inattentive and overconfident. On the other hand, those who fail to grasp overly advanced
material may find their confidence further eroded.
Financial education that fails to actually educate is thus costly for both the provider and the
consumer, and may be worse than no financial education at all. While developing the fundamentals of
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an appropriate financial education programme is best left to experts in theory and practice of
education, behavioural economics may still add new perspectives to the debate.
When participants have limited attention, programmes are most likely to be successful if they
have a narrow scope, or focus on conveying a limited number of key facts or concepts. If overall
programme goals are very ambitious, education may need to be delivered via a series of small or even
repetitive interventions rather than a sweeping one-time interaction to increase retention and avoid
information overload. Alternatively, programmes may take a strategic approach, teaching participants
only basic facts and concepts while also educating them about how to seek out further information,
rather than attempt to present too much material all at once. Resources (print, online or other) should
be provided after the programme is formally concluded, so participants can easily refer to them for
specific details if forgotten. Such materials should summarise key information in a format that is easily
accessible and prompts recall, such as easy checklists.
This also suggests that individual programmes need to set clear priorities by determining their
intended audience and recognising their needs and preferences in order to be selective. As with
marketing material, course material should be as salient and relevant to the target audience as possible.
Targeting a specific audience applies to content, but also to form. Material should be provided in the
appropriate language and at the appropriate grade level. Facts and concepts could be linked to concrete
examples based on the experiences of the target audience. The material should be made vivid in
creative ways (see for instance, the use of video testimonials from relatable individuals by Lusardi et
al. (2009) or by the New Zealand Retirement Commission at www.sorted.org.nz). The overall “look
and feel” of the programme should convey an appealing underlying theme and employ frames and
non-rational cues that reinforce learning appropriate to the target audience. For example, a significant
body of research suggests that gender has an important differentiating role to play in financial decision
making: women have different preferences, show different investment behaviour and respond
differently to framing of choices (e.g. see Croson and Gneezy (2009), or Barber and Odean(1998))
Age can also be an important example: older populations have very different financial needs and
concerns, but also experience changes in cognitive ability and an increased role of affect in decision
making (Agarwal et al, 2007)). As such, programme managers should not only address content related
to later stages of life, but also be sensitive to the role that emotional framing may play in the
presentation of material, for instance by providing education about annuities using positive emotional
triggers.
It should also be noted that while targeting is crucial, it should also be handled with care and
delicacy, and avoid the use of overtly negative or stigmatising stereotypes. Appealing to individuals
in the form in which they feel most control and self-respect can be particularly important. For
instance, simply being referred to as the poor may cause lower-income individuals to reject a
programme altogether (Ross and Nisbett, 1991).
Furthermore, depending on cost and feasibility, in addition to recruiting and content aimed at the
broadly-defined target audience, programmes with sufficient resources may further benefit from
gathering more information about individual participants in order to assign more personalised
instruction. Braunstein and Welch (2002) suggest using credit score records and other demographic
information to develop education materials specific to the needs and difficulties of each individual.
Alternatively short, simple diagnostic tools could be used to collect basic data about financial
experience, subjective preferences and knowledge, as well as tests for common psychological biases.
Individuals could be presented with default course content based on their individual characteristics,
with the option to pursue information with different content or at a different level if desired.
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More directly, insights from behavioural economics may also be the subject of financial
education. Financial education could focus on making consumers self-aware of potential biases and
intuitive but misleading heuristics that affect their financial decisions. For example, consumers may
benefit from demonstrations of how intuitive responses about growth using simple interest diverge
from compound interest calculations. Investors could be educated about how myopic loss aversion can
lead to overly hasty withdrawals from risky assets followed by a failure to buy back in and the lock-in
of large losses, or how naively implementing the “1/n rule” in their portfolios may lead to naive
diversification. To increase relevance as well as saliency, diagnostic tools could also be applied to
directly demonstrate individual biases. For instance, individuals could take a simple test that measures
discount rates at different points in time to estimate their own personal tendency towards timeinconsistency, followed by the teaching of specific strategies to overcome these problems
At the same time, recognising that individuals have a real need to simplify their financial
environment, financial education should aim to help consumers do so in the right way, for instance by
teaching proven rules-of-thumb or problem-solving strategies. For instance, to understand compound
interest, consumers could be taught the “Rule of 72”, which provides a reasonable approximation for
the time taken for an investment to double by taking 72/(interest rate).
Special attention should be paid to numeracy and probability, given that even highly-educated
individuals have consistent and predictable problems with numerical risk formats and correct
probabilistic thinking. In many contexts, it may be appropriate to use verbal or visual representations
rather than percentages.
Apart from audience and content, planners need to consider the context for the delivery of
financial education and the need to provide education in a supportive environment. Rabin (1998)
suggests that financial education may work better in a context where people are cognitively prepared
e.g. work or school. Tufano and Schnieder (2008) note that for most Americans, the primary source of
funds comes from employment and a number of saving options aim to divert funds at this source. This
makes the workplace the most substantively relevant as well as psychologically salient place for
financial education. As discussed previously, timing also matters: individuals may also be more
receptive to learning during specific teachable moments.
Social preferences and networks can also play an important role in generating a supportive
environment. While some interventions may be best delivered anonymously or via mass-media, more
intensive education may be best conducted through personal contact with instructors or small-group
formats. Small peer groups or individual instruction may be particularly effective in situations where
financial matters are considered highly private, where stigma from poor financial literacy or economic
hardship is an issue, or where large group dynamics can override the needs of minorities. Discussion
among peers and testimonials about success or failure can be invaluable in making problems and
solutions more salient and relevant to participants.
In addition, Duflo and Saez (2003) show that word-of-mouth can disseminate education
informally across social networks even outside the purview of regular programme activities.
Programmes should be aware of these opportunities and if possible, provide additional resources (such
as print or online material) for individuals to help ensure that information is correctly transmitted
without distortion.
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Achieving and sustaining positive behavioural change
Even when participant knowledge is improved, programmes that do not ultimately change
behaviour on a significant scale may not be deemed successful. Typically, participants declare their
intent to change their behaviour, but only a minimal fraction actually follow through.
One way to increase the likelihood of behavioural change is to link financial education to
concrete actions as far as possible. If participants tend towards procrastination, programmes could be
connected to immediate decision making. For instance, when studying a financial access initiative,
researchers found a large positive effect of having a bank representative who could complete most of
the necessary paperwork to open an account present during a financial education event (Bertrand,
Mullainathan and Shafir, 2006). Similar interventions could include facilitating enrolment in 401(k)
plans or direct deposit to increase savings at the end of financial education sessions. It should be
noted, however, that since the concept of bundling education together with an enabling action may be
quite powerful, such strategies should be carefully vetted prior to implementation in order to avoid
inducing conflicts of interest or other such problems.
In order to avoid feelings of being overwhelmed, desirable outcomes could be broken down into
small intermediate steps. To increase saliency, participants could be provided with regular reminders,
tools to track and visualise individual progress, such as progressive checklists (with approximate times
for completion) or periodic measures of how much they have gained as a result of the programme to
date (e.g. additional savings, reductions in debt etc).
Programmes could also suggest or actively train participants to use tools that help them to act on
their new knowledge. Very simple decision support could include things as basic as a list of
“behavioural warning signs” to look out for before making decisions. Individuals who are self-aware
of their likelihood for procrastination could be educated about the availability of commitment devices
or taught to create commitment devices for themselves, while those who are more susceptible to
overconfidence or emotions could be taught to impose cooling-off periods upon themselves before
actually following through on a decision.
More directly, programmes could implement commitment devices to ensure that participants
follow up. For instance, after completion, participants could be required to make statements of
intended behavioural change and their progress could then be tracked. While clearly requiring
additional resources, the cost of such follow-up interventions has fallen significantly with technology,
as it is now possible to automate email reminders and calendar notifications, provide online tools for
data logging and visualisation, and generate automatic feedback in response to participants. While this
may not be possible or cost-effective in countries where Internet or computer access is limited, other
channels such as the use of cell phone text messaging could also be explored as alternative ways to
extend post-programme support.
Social pressure and peer effects could also be used as commitment devices of this type to sustain
behavioural change. Actual group meetings to monitor and encourage progress may be most useful,
particularly in settings where community norms are important. Where in-person meetings are less
feasible, programmes could also facilitate peer-to-peer discussions through other means such as
providing online forums for discussion and support. Alternatively, less direct methods could be
applied, such as disseminating information to participants on an ongoing basis about group-level
success in changing behaviour, testimonials and success stories.
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5. Behaviourally-motivated approaches to other policy instruments
Market failures arise even in the standard economic model, requiring policy makers to play an
active role in the provision of public goods and services and in regulation of market participants.
However, deviations from the model increase the complexity of designing policies for consumer
protection, not only because consumers themselves are likely to act in ways contrary to their own selfinterest, but also because such consumers interact with firms that respond to their psychological biases
within specific market settings (Barr et al, 2008). Helping individuals overcome biases in order to
create a financially-healthy consumer base may sometimes be in firms’ best interests (for instance,
banks may wish to promote savings and the opening of new accounts). However, as profit-maximising
entities, they will fail to do so or to even exploit the same biases when that is no longer the case (for
instance, the same banks may seek to encourage over-borrowing by the same consumers). The key
observation is that the appropriate nature of any policy intervention may arise not from biases
themselves, but from the way that biases ultimately affect market incentives.
In the following discussion we explore several ways in which practitioners and policy makers
have drawn on behavioural economics to provide financial goods and services aimed at helping
consumers make better choices. Conversely, we also explore some aspects of regulation motivated by
behavioural economics where the policy maker’s objective is to protect consumers from firms'
indifference or deliberate manipulation.
Designing products and environments that encourage better choices
As behavioural economics has gained in popularity, many innovations in programme and product
design have been developed to compensate for or even leverage known cognitive biases. Below we
examine a number of well-known examples.
Simplifying financial decision making in both private and public spheres. A first principle is to
design choice environments that account for limited attention and potential information overload. For
instance, Iyengar et al. (2004) suggest that participation in private pension plans may be boosted by
offering only a handful of carefully-selected funds, as compared to plans offering a bewildering array
of options. Choi, Laibson, and Madrian (2006) propose the use of Quick Enrolment a mechanism
which simplifies enrolment in employer-sponsored retirement plans by giving individuals the option to
enrol at a pre-selected contribution rate and asset allocation.
More generally speaking, practitioners and policy makers should both be sensitive to the need for
simplicity in structure and documentation. As related earlier, this is true of many aspects of tax
preparation. In the United States, this has led to the development of a simpler alternative “EZ” federal
tax form for qualifying individuals and other initiatives by the IRS (IRS, 2009). In a related example,
the United States is also launching a simplified, online federal student-loan application that allows
students to fill in income data from information the IRS has on file from tax returns with the click of a
mouse, which is projected to increase student loan applications considerably (Camerer et al, 2003). In
addition, several private sector and non-profit entities also offer tax preparation advice and software
tools that simplify taxes for the individual filer, breaking up the process into smaller step-by-step
tasks.
Defaults that encourage positive outcomes. As previously alluded to, defaults can be set to
achieve desired outcomes by exploiting status-quo bias, particularly in the case of retirement savings
plans. A typical example is switching the default option for employee savings plans from nonenrolment to enrolment at a default contribution rate (while allowing the individual to opt-out if
desired). Changing the default to enrolment (with opt-out) dramatically increases participation, with
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results across different firms and countries often in the range of 80-90%. Beshears et al (2006)
demonstrate that defaults have a strong impact on retirement savings outcomes at all stages of the
savings lifecycle, including savings plan participation, savings rates, asset allocation, and postretirement savings distributions. With respect to investment allocations, in some countries, like the
United States, plan fiduciaries are increasingly selecting life-cycle funds as the most appropriate
default option. This is also the most common default choice in the Latin American region (including
pension systems in Chile, Mexico and Peru) where individuals who do not make an active investment
choice are allocated to the provider’s different funds according to age (OECD, 2008)
Commitment devices. Other designs address time-inconsistency using voluntary commitment
devices. For instance, to encourage savings, commitment savings products have been designed that
impose withdrawal restrictions or require savings commitments. In the first case, product rules restrict
participant access to funds for a particular period of time or until a specific goal is met. Tufano and
Schneider (2008) note that these withdrawal commitments can take many forms, such as the
requirement for bank officer signoff for saving withdrawals, term deposits in banks with early
withdrawal penalties, tax advantaged programmes that have withdrawal penalties, or private equity
investments with limited opportunities for exit. Ashraf et al (2003) show that there can be significant
demand for such products from consumers who have self-control problems but are aware of their own
biases. It should be noted that desire for commitment devices is not incompatible with a desire for
contingent liquidity or emergency withdrawals and that some exemptions of this type may also be
added to increase their appeal (for instance, the ability to borrow against 401(k) plan balances in times
of hardship).
An example of savings commitments, on the other hand, is Save More Tomorrow, a product
developed by Thaler and Benartzi (2004). Participants are offered the option to participate in their
retirement savings plan at a low initial contribution rate that automatically increases their plan
contributions up to the maximum in later pay periods. Participants essentially commit to allocate a
substantial part of their future pay raises to savings, a design that helps overcome loss-aversion by
pushing perceived sacrifices into the future while taking advantage of inertia to ensure that the savings
are realised. In their evaluation, Thaler and Benartzi (2004) found that Save More Tomorrow not only
successfully increased average savings for participants but was also extremely popular, with high
voluntary participation and retention rates.
Such product features can similarly be used to address the problem of debt reduction: individuals
with large outstanding debts may benefit from voluntary commitment devices that force them to pay
down balances or cap their ability to borrow below their actual credit limit.
Lottery incentives. Lotteries can be used to incentivise positive behaviour - a natural application
is to make savings more attractive by adding lotteries that give savers the chance to win prizes
allocated randomly (potentially at the cost of interest reductions relative to market rates). Haisley et
al.(2008b) show that low income populations disproportionately play state lotteries, making such
interventions potentially promising in addressing issues related to financial inclusion. While
regulations against gambling have prevented widespread adoption of this design (particularly in the
United States), Tufano and Schneider (2008) point out that lotteries have in fact been used to promote
savings and investment for centuries. A contemporary example is the United Kingdom's Premium
Bonds, which award random prizes as part of the savings product's return with drawings held monthly
and roughly 1.2 million prizes distributed at each drawing. Private financial institutions have also
marketed prize-linked savings products with success internationally, including in Kenya, Mexico,
Venezuela, Columbia, Japan and South Africa.
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Using mental accounting to build savings. As noted previously, individuals tend to regard taxrefund dollars as particularly “saveable”. Prior to 2007, the IRS required that all refund dollars be sent
in a single check or deposit, without allowing filers to earmark a portion for saving. To help
individuals act on their predisposition to save refund money, several non-profit and private-sector
entities such as professional tax-preparers launched initiatives to leverage the opportunity provided by
tax deadlines. These including using the prospect of future refunds to motivate unbanked filers to open
savings accounts, as well as reinforcing mental accounting with voluntary commitment devices by
giving individuals the option to divert funds to savings months or weeks before refund receipt. Starting
in January 2007, the IRS began to allow multiple destinations for refunds with its introduction of Form
8888, a policy change that has significantly lowered the costs of facilitating such programmes (Tufano
and Schneider, 2008).
Leveraging social networks. One example of using social networks to reinforce positive
behaviour is the America Saves! Campaign in the United States, which uses a traditional model of
using peer groups to encourage savings. Begun in 2001, the programme aims to encourage people to
save by setting up city-wide savings campaigns around providing education and encouragement.
Enrolees make a savings plan and pledge to meet their savings goals, supported by various resources
including print media, one-on-one meetings, and savers club. In Cleveland, the first adopter, about
one-third of participants were poor and non-white, and those who participated in savings clubs were
far more likely to report making progress on their savings goals. (Cude and Cai, 2006, as cited in
Tufano and Schneider 2008). With increasing Internet penetration, programmes have evolved to
embrace online communities via websites, blogs and social networking platforms. Other examples
include wesabe.com, a website that combines online money-management tools with a live community
of users who contribute ideas and advice to one another, and networthiq.com, a website that allows
users to post their own net-worth and benchmark their savings progress with that of the entire
community.
Policy makers can promote the adoption of these design principles by aligning the interests of
firms with consumers using tax and other incentives, and actively disseminating best-practices among
private organisations. For instance, Barr et al (2008) propose giving pay-for-performance tax-credits to
banks that offer low-income accounts with some of the features mentioned above. Various initiatives
(including that of the OECD and others) are currently aimed at creating common benchmarks and best
practices in this area. Kahneman and Riepe (1998) and Benartzi (2010), for example, provide simple
checklists for financial advisors and financial services providers, which could be emulated and
disseminated for the use of interested firms.
Regulation for consumer protection
Using behavioural economics to improve disclosure
The potential for firms to exploit the limited attention of consumers gives policy makers a strong
rationale to ensure that consumers receive better disclosures. Gabaix and Laibson (2006) demonstrate
that firms tend to shroud attributes of their products to extract more profits. Even in the absence of
deliberate shrouding, consumers show a robust insensitivity to the features and fees associated with
financial products of all types (Dominitz et al, 2008).
However, evidence on the impact of existing consumer and investment disclosures is very mixed.
Evidence from the United States Federal Trade Commission (2004) showed that disclosing
compensation for mortgage brokers would harm consumers, as they increased confusion and resulted
in borrowers choosing more expensive loans by mistake. Similarly, the United Kingdom’s Better
Regulation Executive (BRE, 2008) found that consumer credit agreements not only failed to impart
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information, but the length and complexity also effectively alienated consumers from all backgrounds.
In the context of investment disclosures, Choi, Laibson and Madrian (2010) show that presenting
potential investors with a one-page summary sheet which explains charges and showed how to
calculate the impact of fees on portfolio value had only modest positive effects on altering portfolio
allocations. Beshears et al. (2009) compared individuals’ performance using newly-adopted Summary
Prospectuses from the United States Securities and Exchange Commission against standard
prospectuses and find that while simplified disclosure significantly improved satisfaction and reduced
time on task, actual choices were not much affected. As the BRE report points out, disclosure
regulations that are not effective may have a negative overall welfare effect, as they are costly to
implement and oversee, burdensome for firms and ultimately appear to leave consumer behaviour
unchanged.
Behavioural research suggests several avenues for improving disclosure. Firstly, given
consumers limited attention, the principle that “more is better” should be carefully reconsidered.
Disclosure presentations should emphasise the saliency of key facts. When comparisons are needed,
appropriate use of graphics and tables should be made and standardised information formats for all
firms in a given industry should be provided to avoid marketing biases.
In particular, policy makers should mandate the highlighting of particular information that is
likely to be underweighted by consumers or shrouded by firms e.g. the true probability of insurance
losses or fees for mutual fund purchases. For instance, Camerer et al (2003) propose that state lotteries
could be required to post prominent information about the odds and payoffs of the gamble, and that
given biases in interpreting small probabilities, it may help to use graphical devices, metaphors or
relative-odds comparisons (e.g. winning the lottery is about as likely as being struck by lightning in
the next week). In another example, some OECD countries mandate that purchasers of life insurance
be provided with a short summary information note of the product summarising its most important
features in a clear format. A number of countries also stress the provision of pre-contract and renewal
information in clear non-technical language and in large print. Spain has also developed specific
regulations regarding the sale of contracts over the internet to heighten awareness of the possibilities
for cancellation of the policy (OECD, 2008).
Framing may also be creatively used. For instance, from 2010, credit card disclosures in the
United States will present consumers with the minimum payment needed each month to pay off their
balances within three years, and how long it would take to be debt-free if only minimum payments are
made. In another example, some retirement savings plan statements from financial service providers
in the United States show participants their balances as well as projected future income streams.
However, this example is illustrative of an additional complexity: in such cases, it is important and
often difficult to ensure that consumers also understand the impact of assumptions that are necessarily
made in order to generate these projections. To address heterogeneity in consumer needs and prevent
information overload while preserving content, another approach is tiered disclosure, which combines
simplification of standard forms with directions on how to obtain more information for more
sophisticated consumers.
Finally, mechanisms could be put in place to increase the likelihood that consumers have read
and understood disclosures, in addition to the common practice of requiring consumers to affirm that
they have done so. For instance, consumers could be required to physically enter the interest rate they
will be paying on their credit card applications in addition to their signatures.
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Product/programme restrictions based on behavioural economics
A more paternalistic direction is to go beyond incentivising desirable programmes and product
features by making them mandatory, or on the other hand, limiting perverse product features or
deliberate manipulation of consumer biases by law.
Compulsory auto-enrolment. The United States’ currently-proposed Automatic IRA is intended
to address the problem of individuals without retirement savings plans by imposing a mandatory autoenrolment programme on employers. In brief, the proposal requires all but the smallest firms to
automatically enrol their employees into tax-advantaged individual retirement accounts (IRAs) if they
do not offer their own retirement plans, with a minimum of 3% of pre-tax earnings to be directdeposited into these accounts. While the IRAs would be held at private-sector financial service
providers, the default allocation would be held in a statutorily-determined low-cost investment option,
and other investment alternatives would also be statutorily-prescribed. Under this plan, employees
retain the option to opt-out, increase their allocations or change their investments.
Restricting the use of perverse defaults. In this respect, the European Commission has already
drawn on behavioural economics by incorporating new language into the recent proposal for a
Consumer Rights Directive that mandates the use of appropriate defaults. This proposal includes a
specific provision stating that “the trader shall seek the express consent of the consumer to any
payment in addition to the remuneration foreseen for the trader's main contractual obligation”. This
provision directly addresses the concern that consumers are more likely to overlook and accept a fee if
they are asked to opt-out rather than to opt-in.
Another example relates to offers that allow individuals to sign up for a particular good or service
for free during a “trial” period, subject to active cancellation. Such “trials” often cause procrastinationprone individuals to become locked into long-term contracts. Regulators could mandate that these
deals are automatically terminated at the end of the trial period, instead of defaulting to a long-term
contract.
Requiring debiasing feedback for consumers. Paying for commitment devices may be attractive
and helpful to sophisticated individuals with self-control problems. However, Malmendier and Della
Vigna (2004,2006) show that when consumers are also overconfident about their ability to comply
with their commitments, contracts with such devices can become exploitative, inducing upfront
overpayment that is ex-post suboptimal. Overconfidence cannot usually be observed by the regulator,
but forcing firms to allow individuals who do not ultimately comply to renege on their contracts
defeats the purpose of the commitment device. However, regulators may be able to require firms to
regularly report feedback to consumers on their performance over time to help debias consumers.
Requiring cooling-off periods. Camerer et al (2003) suggest mandated “cooling-off” periods for
consumers when they undertake significant purchases or decisions, to make sure that people do not
make bad decisions when in highly emotional states or when they are experiencing untoward social
pressure. For example, in the United States, homebuyers are entitled a cooling-off period for home
equity loans during which they have a limited right to rescind certain credit transactions.
Complementarities with financial education
Financial illiteracy and perverse behavioural biases are two related but distinct aspects of the
same overall problem: poor household financial decision making. Many highly financially
sophisticated consumers still suffer from biases such as overconfidence, are overly susceptible to
social pressure and tend to procrastinate beyond what they know to be in their own best interests.
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Other individuals may not have the cognitive capacity to respond to financial education. It should also
be noted that financial education is inherently a long-term endeavour that is not always suited to the
delivery of short-term results. In such situations, the effect of financial education on behavioural
change is naturally limited, and the consumer needs to rely on the use of appropriate products or the
protection afforded by regulation.
However, the reverse is also true: other consumers may lack the information or skills to make
decisions about unfamiliar products and services although they are perfectly rational in their
preferences, beliefs and decision-making. In a most striking example, Guiso and Jappelli(2005) show
that a large fraction of Italian households may not participate in the stock market for the simple reason
that they are entirely unaware of the existence of stocks, mutual funds and investment accounts.
Furthermore, product design and regulation are themselves also inherently limited, especially
when the determination of the “right choice” is not infallible. Many product features that manipulate
individual psychology can be helpful or harmful depending on context. However, the context may not
always be clear to regulators and may not always apply to all individuals equally. Implementing such
policies with a heavy hand may not be ideal or feasible, particularly if the risk of causing more harm
than good is high. Financial education can then act as a substitute or, if such policies are deemed
necessary, as a complement to ensure that consumers who are placed at risk are able to protect
themselves.
For instance, choosing optimal defaults is not always simple (Ayres, 1989). If the default is set
inappropriately, individuals may follow the “wrong” default and simply moving from one suboptimal
state to another. In the context of retirement savings plans, Choi et al (2004) find employees in one
company improved participation under a default of auto-enrolment but also tended to maintain the
default contribution rate as well. Since this rate was relatively low, this actually reduced modal
contributions. Setting a uniform default is also problematic when the “right” option may vary by
individual types, implying that certain individuals could be harmed even when some others gain.
Customising defaults individually (such as setting age-specific default portfolios) may help, but may
not always be feasible or possible, given that some determinants of the optimal default may not be
observable. Less financially-literate workers are most vulnerable in a situation where the “right”
default is ambiguous, as they tend to interpret defaults as advice (Madrian and Shea, 2001). An
alternative to setting a default is to require active decisions about participation, but this design still
fails to aid individuals who are not financially literate enough to make the appropriate choice (Carroll
et al, 2008). In this case, financial education is a critical part of ensuring the safe use of defaults, as
financially-literate workers are more likely to appropriately exercise their right to opt-out if the default
is not suitable.
Another example illustrates that highly paternalistic regulation may be more expensive to sustain,
and ironically may also require more (rather than less) financial education. As individuals tend to
underinsure themselves against mortality and morbidity risk, we may consider compulsory insurance.
However, as pointed out in OECD (2008), in practice insurance policies in Canada, Italy and France
require more information, regulation and supervision when participation is compulsory, in order to
educate individuals about their obligation and to ensure that they choose coverage that is appropriate.
As a final consideration, bundling financial education with other products or programmes
designed to change behaviour can increase the effectiveness of both. For instance, while making
disclosure simpler and more standardised is critical, the use of improved forms could also be made
more efficient by financial education that builds consumer familiarity with the specific form types.
Conversely, conducting a financial education programme immediately prior to offering any type of
product may increase the likelihood of product take-up. Finally, as previously noted, coupling
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financial education with a follow-up programme with some form of commitment device may make
both interventions more likely to succeed.
Financial education and products and regulations that address behavioural biases may therefore
be seen as a set of complementary tools, each of which has its natural strengths. These tools can be
used as substitutes when necessary to overcome specific limitations, or in combination to enhance one
another.
6. Conclusions
The evidence we have to date on financial education shows both successes and failures. While the
importance and scope of financial education programmes have increased and continue to do so, many
challenges remain with respect to take-up, retention and ultimately behaviour change.
Meanwhile, behavioural economics has captured the attention of policy makers as a potential tool
for consumer protection. In 2007, the Australian Government Productivity Commission organised a
Roundtable on Behavioural Economics and Public Policy (AGPC, 2008). A similar meeting to discuss
behavioural economics was also held in the United States by the Federal Trade Commission in 2007.
In 2008, the European Commission Director General for Health and Consumers convened a
conference entitled “How Can Behavioural Economics Improve Policies Affecting Consumers?”
Simple strategies that draw on behavioural economics to improve financial education
programmes include:
•
Adapting administrative processes to counter present-bias and time-inconsistency, and
reinforce commitment to long-term goals of financial well-being.
•
Creating marketing materials and content for financial education programmes that are salient
and relevant to the target consumer, taking into account variation in preferences, limited
attention and emotional responses.
•
Ensuring that the level of material is appropriate for the literacy and numeracy of the target
audience, and that content is simple without being simplistic.
•
Providing education at a time and in a context that supports cognitive preparation, such as in
school and in the workplace.
•
Developing and using appropriate diagnostic tools to help consumers recognise their own
needs and biases, and teaching individuals strategies to help overcome the latter.
•
Clearly communicating specific, concrete and actionable steps and linking the educational
process to immediate action if possible.
•
Reinforcing education with external decision support in the form of information resources
and tools that are easy to find and use, potentially including commitment devices to motivate
and sustain behavioural change.
•
Recognising and working with social preferences to increase take-up, retention and followup, including in-person education, group interaction or social networking.
IMPROVING FINANCIAL EDUCATION EFFICIENCY: OECD-BANK OF ITALY SYMPOSIUM ON FINANCIAL LITERACY © OECD 2011
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II.3. CAN BEHAVIOURAL ECONOMICS BE USED TO MAKE FINANCIAL EDUCATION MORE EFFECTIVE?
While behavioural economics gives us new insights into ways to maximise the impact of
financial education, it simultaneously highlights other psychological and cognitive factors that can
also ultimately act as binding constraints to change and therefore reminds us to be realistic about
financial education itself. Used appropriately, behaviourally-motivated products and regulations can
help compensate for the limitations of financial education. The reverse is also true: financial education
supports and enhances the use of behaviourally-motivated products and regulations. These instruments
can and should be regarded as complements when addressing the full spectrum of issues related to
household financial decision making. Increasing the effectiveness of financial education thus remains
a priority for policy makers and practitioners, and integrating future developments in behavioural
economics into financial education is a key part of continuing to do so.
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Chapter 4
Can Economic Psychology and Behavioural Economics
Help Improve Financial Education?
by
Vera Rita De Mello Ferreira*
This chapter starts by noting that the provision of knowledge and information in itself is not
sufficient; the information must be incorporated into daily life. It then goes on to describe an
innovative solution developed for Brazilian school children. The approach combines information and
recommendations about personal financial issues with information about the way in which
psychological factors may both help and hinder behaviour. This psychological guidance is intended to
raise the pupil’s awareness of their own traits and trigger discussions about the typical psychological
factors that influence financial decision making.
*
International Association for Research in Economic Psychology, Brazil.
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1. Education, mind and behaviour – Where we stand
Financial education deals with information – and learning. It is undeniably essential to help
citizens of any country to better manage their financial life and hopefully make favourable choices that
will contribute to increasing their well-being too.
At the same time, it aims to changing behaviour in the sense that information on financial issues
ought to be incorporated into daily life if we mean financial education to be effective. And this is
where we run into typical difficulties: how can technical information become usable and make an
actual difference in terms of new styles of financial organising regarding the life of individuals, groups
and whole populations?
Some of the problems may be listed as:
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1.
Trouble processing information – data is routinely distorted while being transmitted, whether
in large or small scale, socially or individually, and it is not easy to promptly identify the
way they have been altered, which may lead to strategies rendered useless, money being
wasted, people losing motivation and giving up, financial problems persisting; and this
whole scenario may go unnoticed by policy makers and population alike; at the end, there
may be a feeling of “job done” on the part of the former, and another of insufficiency among
the latter, often experienced as failure to avoid common mistakes and to be able to make the
most favourable choices (Tversky & Kahneman, 1974; Simon, 1978; Kahneman and
Tversky, 1979; Earl et al., 2007).
2.
Human mental operations are anchored on deeper and more primitive emotional factors, and
are never totally free of such influence – emotions either allow for higher functions (related
to thinking) to be achieved or not, and in all cases lend affective dimensions to every area of
the mind; again this may take place unbeknownst to the person or community, but it will
certainly impact all processes, including those related to education and information, and
certainly any change of behaviour; if not addressed, it may hinder all efforts to develop
financial capability (Freud, 1911, 1915; Bion, 1961; Klein, 1963; Ferreira, 2007c; Finucane
et al., 2000; Loewenstein et al., 2001; Slovic, 2002).
3.
Different mental systems – although our motivations seem to always converge towards the
same direction, namely reduce internal tension, whether removing unpleasant stimuli, or
finding gratification for demands felt, the ways to accomplish this goal can be quite distinct,
and this will have major implications for decisions, behaviour – and policy-making; System 1
is the most prevailing and involves fast and almost instinctive unconscious operations
performed without really thinking, based on association instead, in an automatic effortless
and non-controlled way, using primitive ancient brain areas – they can be useful for quick
selecting (on simple basis of pain and pleasure criteria, and highly susceptible to illusions)
and basic surviving, but since it does not involve reflection, there is no real learning, just
training at most; the other one, System 2, has been more recently developed in humankind,
and involves reasoning, language and reflection; it is conscious, more deliberate, and slower,
since it requires effort, going well with control, logic, rules, temporal dimensions and the
possibility of learning (Kahneman, 2002; Slovic, 2002; Thaler & Sunstein, 2008; Freud,
1911).
4.
Hot and cold selves – a great number of our attitude and behaviour inconsistencies can also
be explained by the simultaneous existence of different selves in our personality, particularly
a hot one, that only sees the short term horizon, wishes to be immediately gratified or have
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any threat of frustration dismissed, and disregards consequences; and another one, the cold
state, that is able to ponder and think more carefully, integrating both present and future
scenarios (plus past data as well), and always intends to do what seems to be really best for
oneself, considering the long range as well; the trouble lies on the fact that the latter, also
called the planner, is usually not the one that actually behaves and makes choices when the
time comes – this is up to the “hot” doer, with his customary myopia that will make him/her
lean towards anything that promises instant relief, while previous sensible plans carefully
made by the planner may be entirely forgotten and overcome by present urges – and it
should be noted that the hot self is permanently dipped into what are felt to be present urges
(Thaler & Sunstein, 2008; Freud, 1911; Klein, 1963); this approach can relate to the previous
Systems 1 and 2, respectively.
5.
Planning and excessive optimism – also as a result of the issues above (Systems 1 and 2, hot
and cold selves), it is common to find gross miscalculations involving future plans, that
seldom come out as initially devised; budgets and financial planning are routinely victims of
this typical tendency to overestimate resources and underestimate difficulties and risks;
moreover this attitude is rather resistant to change and it is usually hard to learn from this
kind of experience, which increases the chance to repeat it each time (Kahneman, 2007;
Thaler & Sunstein, 2008; Ariely, 2008).
6.
Cognitive dissonance – this phenomenon, originally described by Festinger, in 1957, may be
found at the root of most mental distortions (cf. ahead “heuristics”) and can be described as
the uncomfortable perception of contradictions within oneself, that leads the person to
attempt to reduce this distress, even if it implies non-constructive behaviour (f.i., suppressing
the awareness of risk while engaging in activities that do involve it, when the attraction
towards desired benefits is felt to be stronger, as we may see in several kinds of investments,
financial crisis, and swindler stories alike) (Shiller, 2000; Thaler & Sunstein, 2008).
7.
Group behaviour – some psychological operations become more prevalent among groups
(usually, the more primitive ones, such as the tendency to act according to herd behaviour,
f.i.), while others turn dimmer (those that involve more rational thinking, waiting, pondering
etc.), which means that the group dimension ought to be accurately considered as far as
policy-making goes, since individual behaviour can be quite different from group behaviour,
and humans live in groups most of the time (Akerlof & Shiller, 2009; Shiller, 2000; Freud,
1921; Bion, 1970, 1975).
8.
Reality is perceived in different ways by individuals, groups and cultures, and this perception
may also vary within them at different moments, all of which will have implications in their
reacting to stimuli, grasping and decoding data, and making choices (Lea et al., 1987).
9.
It is common to justify choices using apparently rational arguments, even though true
motivation may be far from that; besides, the person can be altogether unaware of her
motivation – and still be able to offer long explanations for it all the same (Bion, 1970).
10. In summary, we are all subject to both cognitive and emotional limitations regarding
perception, memory and judgment of data, resort to mental shortcuts (heuristics) in an
attempt to deal with complexity that may lie above our competence and as a result, display
several systematic errors while trying to make choices, which often turn out to be
inconsistent. Some authors will go as far to say that we are more similar to Homer Simpson,
the character from the cartoons, than to the model of homo-oeconomicus that traditional
economics assigns to us (Thaler & Sunstein, 2008).
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Since financial management often implies choices over alternatives amidst a scenario of growing
complexity, including some that may take place only once or seldom in a lifetime (e.g. retiring, buying
a home, having children), it is not a simple job to try and get them always right (Van Raaij et al.,
2007). Lack of information is certainly a major problem, but even when it is available, dealing with
technical details is of no less importance – particularly when decision-makers can stumble over so
many shortcomings, including those of psychological nature.
The areas lying in the intersection between psychology and economics, namely economic
psychology and behavioural economics, have been researching the issues around bounded rationality –
as opposed to rationality that optimises choices, as conceived by mainstream economics – for many
decades now and may offer some insight on how to address them, thus becoming a relevant ally to
financial education initiatives.
2. Economic psychology or behavioural economics – Is there a difference?
Both economic psychology and behavioural economics study the same subject: economic
behaviour and decision-making, and may be seen as practically the same discipline. Economic
psychology dates back to 1881, when Gabriel Tarde, a French jurist and social thinker first used the
expression to indicate the need for economics to expand so as to include psychological perspectives
into their explanations of economic behaviour. Later on, in 1902, he also published a book titled La
Psychologie Economique (Wärneryd, 2008). Around the same time, another social thinker, Thorstein
Veblen, of Norwegian origin but living in the US, also discussed and published criticism towards the
narrowness of the conventional economic outlook, but his efforts did not find a warm welcome among
the academic community. It was during World War II that a researcher who had training both in
psychology and economics, George Katona, Hungarian emigrated to the US, made the first large
surveys on the Consumer Sentiment Index, that wound up surprising policy makers and the economic
community alike. Contrary to the current economists’ view that predicted another recession for the US
after the war, Katona and his team pointed to a coming boom, which did indeed take place over the
following years. This is considered to be the beginning of contemporary economic psychology, and his
book Psychological Economics (1975) a landmark for it. It is also worth noting that in 1978 Herbert
Simon, trained in economics, psychology, business and artificial intelligence, won the Nobel Prize of
Economics for his bounded rationality theory. However, the zeitgeist at the time, crowning rationality
and expected utility theory as absolute rulers, did not seem to be quite favourable to this type of
questioning and resonance was only moderate (Ferreira, 2007a, 2008).
Around the same time, however, two social psychologists, Amos Tversky and Daniel Kahneman,
were running experiments and identifying a great number of systematic errors related to the use of
shortcuts, heuristics, for judging data in decision-making. In 1980, an economist who did not accept
mainstream assumptions in traditional economics, Richard Thaler, also began to publish articles that
debated actual economic behaviour, as opposed to what was expected – and taken for granted – by
orthodox economics. A few other economists shared these views, and this is considered to be the
beginning of behavioural economics. Another behavioural economist, Peter Earl, describes the field as
follows:
Behavioural economics draws upon fieldwork, experiments and research in disciplines such
as psychology for building blocks to construct economic analysis that is more descriptively
realistic and both augments and qualifies traditional economics as a tool for designing
policy. (…) Whereas economists traditionally have seen choice as an optimising activity
subject to given preferences and a well-defined budget constraint, behavioural economics
sees everyday life as a process in which humans with limited cognitive capacity try to cope
with both information overload and the absence of relevant information and knowledge by
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evolving targets for what seems feasible and systems of rules for trying to find ways of
meeting these targets. (Earl, 2005, p.1)
Further into this dialog between economics and psychology, in 2002, Amos Tversky had
deceased, so Daniel Kahneman alone became the first psychologist to win the Nobel Prize in
economics, for their work together on heuristics, biases and the prospect theory, based on experiments,
which countered the expected utility theory, stating that our choices are not always consistent. This is
probably the most important research line in the field to date, and it also supports the arguments in the
present discussion.
To summarise, the discipline originally discussed how the economic science could be expanded,
helped mainly by psychology and sociology. Later on, it gained a bounded rationality perspective,
with Simon’s theory, regarding mental processing of data, and having, as one important unfolding, the
idea that decisions could be at most satisficing, but never optimal, going against the mainstream
economic view on economic behaviour. Due to our computing and resource limitations, Simon defines
bounded rationality as “the need to search for decision alternatives, the replacement of optimisation
by targets and satisficing goals, and mechanisms of learning and adaptation” (1978, p.366),
explaining that “decision makers can satisfice either by finding optimum solutions for a simplified
world, or by finding satisfactory solutions for a more realistic world.” (p.345).
As a result of this view, the investigation of systematic errors followed, derived from experiments
that tested heuristics and biases (cf. a comprehensive list of heuristics at the next section). More
recently, however, research in the area has been focusing emotions and their powerful influence over
behaviour and attitudes, particularly troubles concerning lack of self control and failure to reflect upon
relevant issues, consequently incurring on mistakes and economic and financial vicious circles (f.i.,
Loewenstein, 2006; Lerner et al., 2005; Shiv et al., 2005; Loewenstein et al., 2001; Finucane et al.,
2000; Ferreira, 2007c). This has been supported by studies undertaken by neuroscience as well, that
have provided evidence for the prominent role of emotions in human mental functioning using brain
scanning techniques to map decision-making neurological circuits. And finally – the answer to the
question at the title of this section is “no”, there is no difference today between economic psychology
and behavioural economics.
3. A List of Heuristics by Peter Earl1
The respected behavioural economist Peter Earl, who has been a professor on both Australian and
New Zealander universities, prepared a paper for New Zealand government in 2005, where he
summarises the main heuristics that may be encountered within decision-making, cataloguing them
according to the step of the process where they tend to occur. his list is reproduced below:
Heuristics and biases in acquiring information
•
Availability bias — judgment is affected by the ease of recall of examples/frequency with
which events are publicised rather than being proportionate to frequency of occurrence.
•
Selective perception — people tend to see what they expect to see, downplay counterexamples and seek verification for their expectations rather than looking for anomalies.
•
Concrete information dominates over abstract, statistical information.
•
The use of frequency, not relative frequency, to judge the strength of predictive
relationships.
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•
Illusory correlation — people often select inappropriate variables as supposed causes of
particular phenomena.
•
The focus of decision makers depends on how data are presented — for example,
quantitative data may inhibit concentration on qualitative data, or vice versa; which items of
information are absorbed may depend on their places in a sequence of pieces of information,
while seemingly logical displays of data may distract people from crucial data that are
missing, and so on.
•
Framing effects — for example, how inclined a person is to search to save money on a
product may depend on the proportionate saving that he or she thinks it might be possible to
achieve, rather than the absolute amount, even though a 1 % saving on, say, a $10 000 car is
more than a 10 % saving on a $500 in-car entertainment system.
Heuristics and biases in processing information
•
Tendencies to treat small probabilities as zero probabilities and large probabilities as
certainties, or to avoid thinking in terms of a range of possible outcomes and instead focus
only a single “best guess”.
•
Poor understanding of compound probabilities.
•
Tendencies to fail to use a consistent judgmental strategy over repeated cases.
•
Law of small numbers — giving too much weight to small sample results.
•
Tendencies to discount the future hyperbolically, not exponentially, which can make people
prone problems of addiction.
•
Superficial evaluation in the face of complexity/emotional stress, resulting in impulsive
choices.
•
Social pressures tend to cause judgments to be distorted in favour of the majority view,
however ill-founded it might be (as in the story of The Emperor’s New Clothes).
Heuristics and biases in choice
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•
Sunk cost bias — as where a person consumes something (say, the facilities of a fitness club)
because they have already spent money enabling them to do so; their continued consumption
of it is a way of making their expenditure seem justified, even though, if they could “turn the
clock back”, they would not consume it even if it were available without any charge.
•
Endowment effect — how much a person will require to give up something they already
have tends to be more than what they would have been willing to pay to acquire it in the first
place.
•
Illusion of control — the very act of making a choice can make people feel less worried
about uncertainties that they earlier perceived.
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•
Wishful thinking — to make a choice seem appropriate when it is being taken for reasons
that they are reluctant or unable to admit to themselves or others, people tend to inflate their
estimates of its payoffs in other dimensions.
•
Those who are aware of their fallibility as decision makers tend to pursue self control
strategies to prevent themselves from being led into temptation, even though they know that
these strategies promise them less than they would be able to achieve if they chose
alternative strategies that depended on them being able to control themselves. (For example,
some consumers voluntarily open Christmas Club Savings Accounts that offer miserly rates
of interest but have the advantage of being impossible to access for withdrawals until
Christmas approaches.)
Post-choice heuristics and biases
•
“Gambler’s fallacy” — after observing a run of one kind of outcome, people begin to assume
odds of its rival happening are increasing.
•
Attribution bias — people tend to see success as due to their own skill, but failure as due to
“bad luck”.
•
Mental recall problems, which cause erroneous reconstructions of what happened and affect
subsequent choices.
•
Hindsight bias — people tend to be able to find plausible explanations for things that in
prospect would have been surprising to them.
All these heuristics and their resulting biases will certainly disturb adequate decision-making
inducing to systematic errors – most people make them, most of the time –, and for this reason ought
to be addressed by financial education programmes.
4. Financial education and economic psychology – A promising dialogue
With knowledge of this kind in hand and properly adapted to the intended target population,
financial education programmes can benefit from reaching further into all mental systems, that is, 1
and 2, thus increasing chances for real change in behaviour and consequently more beneficial choices.
Since programmes must address the automatic mental system if they mean to actually change
behaviour, conveying technical information alone rarely gets to the point in this respect.
It is worth noting that although economic psychology and consumer psychology share the same
subject – studies on economic behaviour and decision-making – we consider the former to have almost
the opposite vocation when compared to the latter. In our view, economic psychology and behavioural
economics should help citizens to become more aware of their own psychological operations while
consuming, planning, investing, i.e. making choices, rather than inform manufacturers or advertisers
who may take advantage of their already identified vulnerabilities in these processes. Therefore,
economic psychology would have much in common with financial education programmes that have a
similar goal of trying to help citizens to improve their economic and financial decisions.
Brazil has taken some initial steps towards this goal with ENEF-Estratégia Nacional de Educação
Financeira, the proposal for a financial education programme launched by federal government and
coordinated by Brazilian Central Bank, CVM, our equivalent to SEC-Securities and Exchange
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Commission, PREVIC (formerly SPC), the Private Pension Plans Secretary, and SUSEP,
Superintendence of Private Insurance, along with the Ministries of Education and of Justice, school
systems representatives and several non-government organisations. In its pilot version it is initially
directed to high school students, who shall receive a book (BRASIL COREMEC, 2010) designed to be
used by teachers of any subject, since contents are displayed in accessible format, both visually and
content-wise.
In action – the Brazilian programme
ENEF material was prepared by specialists on education, along with consultants for finance,
communication and economic psychology (the latter, Vera R.M. Ferreira). It addresses daily life
situations, involving the financial aspects of family and social life, personal belongings, work,
entrepreneurship, projects, public goods, national and international economics, over different time
spans (short, medium and long term). There are seventy-two learning opportunities, that comprehend
items such as: a recap of what is actually done in that situation by the student at that point, another one
to check what has been discussed, potential adaptations to regional differences, social and
environmental responsibility, possibilities of disseminating this knowledge, autonomous decisionmaking, that intends to translate the notions into individual and context use, besides the economic
psychological blinkers.
These blinkers, in the shape of red boxes highlighted in the book, convey practical economic
psychological notions that can be used in daily life, such as mental accounting, inter-temporal choice
with hyperbolic discounting, anchoring, framing, impulsive buying, credit use, the role of illusions,
affective forecasting related to consumption, marketing traps and other psychological factors present
in economic and financial decision-making.
Based on the assumption that technical information on finance is not enough to actually change
behaviour, due to factors such as our above mentioned bounded rationality and vastly documented
anomalies and inconsistencies in economic behaviour, biases in perception, memory and judgement of
data, plus the influence of emotions on decision-making, these contributions, originated in research on
economic psychology, have been included. Their goal is to raise awareness, offer favourable
conditions to the appearance of insights both over systematic errors and strategies to better deal with
them, and to trigger discussions on the psychology of economic decisions (Ferreira, 2007b, 2008;
Ferreira & Lima, 2009).
The programme is initially dedicated to high school students, and later on it is intended to reach
elementary schools as well. Teachers will be trained at first, and they are expected to work at least in
pairs in each school. The pilot version of the programme is starting June 2010, when over two hundred
schools in four different states will use the material. These will be evaluated in contrast to an
equivalent number of other schools that shall be part of the control group. This thorough evaluation,
due to be finished in 2011, will also verify the psychological impact of the programme, in which may
be a rare opportunity to be able to measure this kind of result in this size of scale. To our knowledge,
this is the first financial education national programme to include economic psychology/behavioural
economics to this extent.
Here are some examples taken from the book (BRASIL COREMEC, 2010):
1.
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In the “daily family life” section, while discussing about budget, writing down expenses, and
saving, the blinker says:
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Another common mistake is not to have control over the money saved. To avoid spending on
other things the money you have saved when you did not have that snack, what about putting
it away in an envelope where you can write down the name of your goal – “new sneakers”?
This is a good technique because when we name the money, we respect more what we intend
to do with it. It is important to have discipline and patience, sticking to our goal. Otherwise,
we may forget why we have been saving money, and decide to spend it on impulse, thus
jeopardising our planning. We can decide to change our project at any time and spend the
money we had been saving, but should beware of what we are doing. (p.19)
2.
In the same section, but on credit:
Remember that everything in life is finite… Not only money, but time, efforts, energy, health,
and even life itself! This is why making these choices is unavoidable – there is no way you
can have it all, all the time. At such moments, lowering your expectations might be the smart
thing to do! It is not about being mediocre, but rather stopping tormenting yourself over
impossible unfeasible goals, while you concentrate your energy on what you can actually
achieve. (p.29)
3.
In the “social life” section, on consuming:
Sometimes we wonder whether spending money on something is important or not. Do we
really need that? How can we decide about it? Here is one hint: don’t buy it immediately,
but rather allow yourself a brief interval, count up to 100, leave the store, or wait to
purchase it the next day. This really works. If it was not important, but rather guided by
impulse, using these strategies pushes the impulse aside and in general we will not buy
something when we really did not need it. (p.69)
4.
In the same section, on credit:
The use of cards or checks stimulates further spending, more than we would had we been
using cash – this has already been confirmed by several studies. It seems that watching the
money actually leaving the wallet is felt to be more “painful”, while using credit or debt
cards seem painless. The same goes for filling a check. After all, away from the eyes… (p.83)
5.
In the section “personal belongings”, on the perspective of buying a computer:
You are not forced to always try and get as much money as possible. The cost of a choice is
not always measured by money. Happiness, well-being and health may be more important
too. Don’t forget that happiness implies sacrifices and giving up as well, so be careful when
you exchange a greater happiness later on for a little immediate satisfaction. Just be aware
of the costs involved and decide what is best for you in each situation, calculating well the
cost of your decisions. (p.116)
6.
In the same section, on consuming with responsibility, some brief explanations on
psychological “traps” are added, f.i. about:
a. Focalism – when I imagine, NOW, what I will be feeling when I actually have the product,
I am dedicating all my attention to this subject, therefore I will suppose that I will be very
happy, or not, when I do buy it. However, if I wind up buying it, that is going to happen in
another moment, when I will have other concerns and feelings in mind, and there is no
guarantee that I will feel the same as I had previously supposed I would. That is, focus
changes.
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b. Difference between the “hot self” and the “cold self” – when I am burning with the desire
to have an object (we can sweat, get anxious and may not even know the reason for it very
clearly), I lend this object the power to make me the happiest person in the world, the most
powerful and beautiful etc. “I’ll be amazing when I wear this shirt”, “This mobile is more
than perfect”, and so on. Later on, though, when I really purchase it, I realise that nothing
has changed, I am still the same person and all. “Oh boy, that wasn’t all the success that I
had anticipated.” It is similar to going grocery shopping when one is hungry (“hot”), or
after eating (“cold”). Usually, people who go to the supermarket hungry will buy much more
products than those who go in a more serene state. (p.130)
There are over 20 of such “blinkers” in this volume, that draw attention to issues such as:
compulsive and impulsive buying (including notions like the fact that our desires have an unconscious
root, and can never be fully satisfied, plus the importance of comparing prices before purchasing); the
real meaning of taking credit (it is not like that you have become any richer, since it will have to be
paid back later – and with interest, that can be as high as 12% a month, in Brazil!); anchoring (and
how we are susceptible to reference values, i.e., this can easily be manipulated by publicity, f.i.);
framing (upon the example of prices routinely being displayed as $xxx,99, that induce us to believe it
is significantly cheaper than the full price); several on mental accounting (the importance of planning
carefully and on real basis, i.e., net rather than gross income, that looks more attractive, since it is
higher; the risks of relying on future income and destining it to too many goals, that will prove to be
unattainable at the end, along with temptations seen in advertising, all this resulting in possible debt
problems; the difference between having bills of higher value and bills of lower value in the wallet, as
the latter tend to be spent faster and more carelessly); the power of group pressure upon consuming
and, often enough, buying things one does not need; the difference between feasible dreams and
unrealistic ones.
There is also a short section on behavioural finance itself, explaining what it is and giving
examples of studies, and a quick quiz to help identify what kind of consumer the person is, regarding
psychological features.
Most of the information is not generally known by this population (high school students), and
possibly neither by their families, so it is expected that these notions will arouse their interest, making
them pay closer attention to their own economic behaviour, while also bringing the topic home to
discuss among family and friends. These students would thus act as multipliers disseminating this
knowledge even further.
Another line of contribution emerges from a recent topic that has been researched and discussed,
mainly by behavioural economists, involving choice architecture. The Brazilian programme has not
incorporated this type of context designing yet, but it is already an important step to have included
psychological economic notions in it, thus providing a pioneer perspective to financial education so
far. Nevertheless, it is worthwhile discussing this perspective as it may offer instigating insights to
financial education.
In debate – choice architecture and policy-making
Choice architecture, also known under different nominations, such as light paternalism
(Loewenstein & Haisley, 2008), libertarian paternalism (Sunstein & Thaler, 2003, Thaler & Sunstein,
2008) or asymmetric paternalism (Camerer et al., 2003 apud Loewenstein & Haisley, 2008), proposes
the design of contexts to make them favourable to induce decision-makers towards better choices
(Ferreira & Lima, 2009). Naturally, there may be a debate around what is “better”, and to whom it is
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better, but we can also remember that policy-making does involve this issue in a rather irrevocable
way as well. So let’s first examine their argument.
Thaler and Sunstein (2008) explain that good decisions are made when one has experience, good
information and immediate feedback, while bad ones result from lack of experience, too little
information and either slow or scarce feedback. In their view, knowledge about human behaviour can
be greatly enhanced if we take a close look at how we make systematic mistakes, and in turn, knowing
how we think should help to design foolproof contexts.
Considering that people are more often than not trying to make choices and deal with a complex
world, far from the ideal conditions to think and examine their options, they usually resort to shortcuts
to do it, which may always represent hazards to them as well. They are busy and their attention –
another limited resource – must tend to several issues at the same time. These heuristics – or rules of
thumb – are supposed to turn the tasks of perceiving and judging simpler and faster, but as we have
seen, they also lose accuracy, and routinely lead to biases, some of which may drive one to systematic
errors. At the same time, routine and habits, along with our natural tendency to inertia, can be very
powerful to dictate (inadequate) behaviour.
There is also a concern over fairness in their proposal: choice architecture and the implementation
of nudges – subtle clues to push the person towards the option she would like to choose herself, but
might get confused midway due to all limitations previously described – would help minimise costs
imposed over those who, despite their best intentions, do not succeed making good choices. The idea
is “to see how the world might be made easier, or safer, for the Homers among us (and the Homer
lurking somewhere in each of us). If people can rely on their Automatic Systems without getting into
terrible trouble, their lives should be easier, better, and longer.” (Thaler & Sunstein, 2008, p.22). In
other words, libertarian paternalism golden rule is to “offer nudges that are most likely to help and
least likely to inflict harm” (p.72), in order to help less sophisticated people while imposing minimal
costs on others.
To them, nudges are necessary when:
1.
choices have delayed effects;
2.
choices are difficult, infrequent and offer insufficient feedback;
3.
the relation between choice and experience is ambiguous.
A few points ought to be made on choice architecture before we go on with its main proposals: it
is around, whether we like it or not, whether we are aware of it or not; and it can be either favourable
to decision-makers or not, but there is little doubt that it will affect them. Therefore, it is relevant to
policy-making to get acquainted with its basic principles, as stated by Thaler and Sunstein (2008, p.8397):
1.
Defaults – there is a general tendency to choose the option that offers the least resistance,
thus the enormous power of status quo conditions – leave things the way they are, or else
choose not to choose – “I’ll take whatever comes…”
− therefore, it is very important to make sure what kind of default option in offered, since
most people will pick it simply because it is the default, without analysing it any closer;
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− one common example is subscriptions with automatic renewal, that guarantee high rates
of adherence;
− however, not all default options are best for decision-makers – nevertheless, it will be
unavoidable to always have some default option when decisions are at stake, so this will
have to be carefully considered by policy makers.
2.
Errors – human beings are far from being foolproof, so designing settings and decisionmaking contexts should take this into consideration:
− errors can be found in all realms, from forgetting cards at ATM’s (after finishing a task,
our mind shuts off that function and our attention is directed to other activities), to
surgeons operating on wrong limbs, patients forgetting to take their medicine,
unnecessary items being purchased etc;
− design that addresses our shortcomings can help better choices to be made.
3.
Feedback – this is the best practice to improve performance in almost all areas – we learn
when we have information immediately after having done something, when it is fresh in our
minds and we have the chance to correct whatever may be necessary:
− once again, well designed systems would inform when some task was performed
correctly or not, and even better, warn just before some problem might occur (f.i., just
like the warning before the battery in devices go too low, could a similar procedure be
adopted by banks, before clients run out of funds? – with an important observation,
though: these warnings cannot be too frequent, otherwise we tend to ignore them!; and of
course banks would have to be nudged in this direction…).
4.
Linking – or mapping – choice to welfare – in complex decisions it is not easy to imagine
later or collateral effects and other consequences, real benefits etc., so it would be helpful to
improve the ability to map choices as fully as possible, thus making the selection of
favourable alternatives more likely; this can be done:
− making each option understandable – f.i., transforming numbers into elements used in
daily life instead;
− turning costs that are hard to devise – f.i., the costs of having a credit card, mobile phone,
insurance, instalments and other items – into easy to calculate and relate to activities,
bringing all fees, taxes, interest etc. together, in order to also make it simpler to compare
products; also this kind of information should be displayed clearly in terms of language
and format (large enough fonts etc.);
− another measure is having companies send their clients once a year the complete list of
services used by them with all costs involved, so they might be able to properly compare
them to competitors and choose what is best for them – this would also encourage people
to improve their ability to choose.
5.
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Complex choice structuring – since there are different strategies used to choose (trade-off is
used when there are few options, f.i., while other methods, including some that can be
misleading and hazardous, may be employed when there is a larger number of them, such as
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compensatory strategy, when the high value of one feature makes up for the lower one of
another, or selection of priority, cutting off what does not reach these criteria, all trying to
simplify the several dimensions involved, sometimes to the point of losing focus), choice
architecture ought to be used to structure this process:
− the main point here is to help people to learn how to go about choosing so that later on
they may do it on their own with better results.
Social influence is yet another major issue regarding change of behaviour and potential nudges,
and it is so important because this is how humans learn – with the others around –, and this is how
individuals and society develop. Therefore it ought to be particularly addressed by policy-making.
Here are some basic types of social influence:
1.
Information – if we believe that many people think or do something, we tend to understand
that it would be best for us too;
2.
Peer pressure – we tend to display herd behaviour because we do not wish to stand out (or at
least not too much), so it is preferred to make mistakes along with other people rather than
taking the chance to be right on our own;
3.
Famous people can influence the public dramatically, as the latter tend to follow their advice
and imitate their behaviour.
This is only an introduction to this discussion. Many other examples could be given – or created.
Choice architecture is about human fallibility and it reminds us that offering financial education to the
population may not be enough. Policy makers ought to go on debating regulations and other context
designing if the aim is to provide decision-makers with better opportunities to make favourable
choices (Beshears et al., 2008; Choi et al., 2005). In particular, it might be useful to calculate and
compare costs and results, between conventional measures involving education on one hand, and
simple devices such as sending reminders over mobile phones about the same issue, on the other, so as
to have a more concrete view of the efficacy of each strategy – and continue evaluating both. One
example could involve saving: every month, each person from the target population would receive
three mobile phone messages reminding her that 1) she had planned to deposit some money in her
savings account two days ahead, 2) two days later, that this is the day for actually depositing it, and 3)
finally, the one checking whether the deposit was indeed made. Would something like this deliver
better results than a formal campaign? These are the type of data that could be empirically found,
measured and assessed for more precise policy designing.
Of course it seems that combinations of education and choice architecture would render even
better results. One important concern is to actually have people learn and develop more mature
attitudes and behaviours, towards goals of autonomy and emancipation. We believe there is potential
for further innovations and give one example below.
In the future – an interactive Museum of Economic Psychology to further develop financial
education in Brazil and other countries
A museum can be described as a permanent institution focused on general interest and aiming at
collecting, keeping, researching and treasuring in different manners items that have cultural value. It is
associated to memory, cataloguing and collecting objects or concepts, as is the case with the Brazilian
Museu da Língua Portuguesa2 (Portuguese Language Museum), or other intangible items, like in the
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also Brazilian Museu da Pessoa3 (Museum of the Person), that collects ordinary people’s life stories
and testimonies in audio and video.
Modern museums currently rely on electronic technology to expand the scope of their collections,
making them more accessible to visitors and in many cases, also interactive and in constant dialog
with the public.
Economic psychology already has a consistent body of empirical data and solid literature, which
allows for organising it in the shape of a modern museum. Such museum would gather information on
psychological factors found in economic decisions made by citizens (consumers and investors), and by
policy makers, initially as a website and eventually as a concrete physical location. The goal is to
inform, raise awareness and engage users in developing tools to improve their decision-making
processes, so emphasis would lay on systematic errors and the creation of antidotes to them, with data
being displayed as sketches, brief explanations and speeches, in both audio and video forms, among
others.
The collection would be permanently increased by users themselves as well as specialists, as they
constantly added new information and data, keeping it alive, relevant and updated. Besides working as
a tool for psychological-economic orientation for individuals and groups, it is also intended to become
an embryo think tank, capable of producing contributions for debates around policymaking, with
necessary adaptations so as to be also reproduced in different towns and communities.
The idea for this museum was originally devised at OECD Brazilian International Conference on
Financial Education, organised by CVM-Comissão de Valores Mobiliários and OECD-Organisation
for Economic Co-operation and Development, in December 2009, in Rio de Janeiro, when the
Mexican representative (Germán Saldívar Osorio) mentioned that there was an Interactive Museum of
Economics in Mexico4, that displays objects related to the area at a physical location, along with
symposia, educational activities, and online alternatives as well.
Upon hearing him, one of the authors (Ferreira) associated it to the idea of the two Brazilian
museums mentioned above, and began to work on the project for this museum that would bring
together data from the already extensive research in the psychological-economic area to work as an
interactive museum, aiming at building strategies to promote awareness, learning and change of
behaviour, particular in the collective dimension and in that of policy-making. Over-indebtedness
would be another important issue addressed here (Ferreira, 2008; Lea & Anand, 2007; Wrapson et al.,
2007). Emphasis would of course lay on psychological factors, that are essential to any process of
transformation, be it individual or social.
In summary, its goals would be to:
116
1.
Protect individuals, groups and organisations from errors due to their own psychological
limitations, as well as to appeals coming from frauds and marketing itself, while at the same
time offering tools to better manage their economic decisions with responsibility and
autonomy.
2.
Disseminate warnings on psychological traps present in different aspects of economic
behaviour, according to economic-psychological literature, and transmit them in mass scale.
3.
Contribute to micro finance initiatives, adding the psychological perspective to the
introduction of micro credit, savings, insurance etc. (Ferreira, 2008; Tufano & Schneider,
2008; Monzoni, 2008; Magalhães & Junqueira, 2007; Abramovay et al., 2004).
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4.
Encourage interactivity, exchange of ideas and experience among users/visitors, specialists
and policy makers.
5.
Become a think tank in the area, being able to provide content and strategies to reflect,
debate and build alternatives to improve economic and financial decision-making, having
government and non-government institutions as partners too.
Regarding the collection, that could be displayed using different electronic formats as support,
such as text, photos, audio, video, simulators, and games, the museum could offer:
1.
Basic notions on economic psychology/behavioural economics, decision-making and
systematic errors, with short explanations and practical examples of heuristics and biases, on
issues such as credit and debt, saving, investment, insurance, retirement, pension plans,
consumption, environment etc.
2.
Academic and scientific production.
3.
Interviews, testimonies and stories told by users/visitors about economic management of
their personal lives or experience with public finance and institutions.
4.
“Antidotes” against systematic errors and excessive consumption and spending.
5.
Examples of choice architecture.
6.
Suggestions for policy-making.
7.
Games, music, sketches and plays supporting the contents above.
8.
Links for other relevant websites.
9.
Research, debates and symposia.
10. The history of the field, comprehending economic psychology, behavioural economics and
finance, neuroeconomics.
This project, that may have, among others, a foundation dedicated to research in finance and
another one dedicated to consumer protection as possible partners, could also be the starting point for
similar initiatives in other communities and countries, and all such museums could integrate a net for
further reaching new levels of development and a greater number of visitors.
5. Conclusions
Education, awareness, empowerment, change of behaviour. The goals for financial education
programmes are ambitious – and they need to be so if making a difference is intended. On the other
hand, however, we have a great number of limitations, many of which seeming to be inherent to
human condition. Can the puzzle be solved and financial capability acquired by significant portions of
the population?
This is no easy job and perhaps the only way to go about it – and to learn from this experience –
is to bring different perspectives and backgrounds together to cooperate and integrate, and closely
observe this process so it is possible to correct eventual mistakes early on. One point may be clear
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though: if policy-making does not fully take mental functioning and all its unfolding into account,
financial education programmes will hardly experience consistent efficacy. Here is one invitation to
collaborate. We believe that financial education and economic psychology/behavioural economics
have a promising partnership ahead.
Notes
1
2
EARL, Peter E. “Behavioral Economics and the Economics of Regulation”. Briefing paper prepared for the
New Zealand Ministry of Economic Development, 2005, p.11-12.
http://www.museulinguaportuguesa.org.br/museudalinguaportuguesa/index.html
3
http://museudapessoa.net/
4
http://www.mide.org.mx/
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Monzoni, Mario. Impacto em renda do microcrédito. São Paulo: Peirópolis, 2008.
Shiller, Robert. Exuberância irracional. São Paulo: Makron Books, 2000.
Shiv, Baba, Loewenstein, George, Bechara, Antoine, Damasio, Hannah & Damasio, Antonio.
“Investment Behaviour and the Negative Side of Emotion”. Psychological Science, 16 (6): 435439, 2005.
Simon, Herbert A. “Rational decision-making in business organizations”. Nobel Memorial
Lecture.08.12.1978. Economic Science 1978. 343-371.
Slovic, Paul. “Rational Actors or Rational Fools: Implications of the Affect Heuristic for Behavioral
Economics”. Paper presented as part of the lecture series commemorating the 10th anniversary
of the Center for the Study of Rationality, The Hebrew University, Jerusalem, Israel; June 2002.
Sunstein, Cass & Thaler, Richard. “Libertarian paternalism is not an oxymoron”. Working Paper No.
03-2, The University of Chicago Law School, 2003.
Thaler, Richard & Sunstein, Cass. Nudge – Improving Decisions about Health, Wealth and Happiness.
New Haven & London: Yale University Press, 2008.
Tufano, Peter & Scheider, Daniel. “Using Financial Innovation to Support Savers: From Coercion to
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Tversky, Amos e Kahneman, Daniel. “Judgment under uncertainty: heuristics and biases”. Science,
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Van Raaij, W. Fred, Antonides, Gerrit & de Groot, I. Manon. “Financial Capability, Motivation and
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Wärneryd, Karl-Erik. “The psychological underpinnings of economics: Economic psychology
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Wrapson, Wendy, Mewse, Avril J. & LEA, Stephen E.G. “Social identity and attitudes in problem
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Part III
Importance of Financial Education in the Context
of Defined Contribution Pension Plans
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Chapter 5
Financial Literacy and the Shift From Defined Benefit
to Defined Contribution Pension Plans
by
Annamaria Lusardi*
The shift to defined contribution pensions requires people to be knowledgeable about finance and
economics, yet evidence suggests that even basic numeracy is poor amongst a sizeable proportion of
working adults. This chapter discussed the evidence and the provision of financial education
programmes that are designed to address the problem. It then goes on to consider ways of improving
financial education and alternative ways of stimulating retirement planning.
*
Professor, Dartmouth College, USA.
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1. Introduction
More than ever before, individuals are in charge of their own financial security after retirement.
The shift from defined benefit (DB) to defined contribution (DC) pension plans that has occurred over
the past twenty years has put individuals in charge of deciding how much to save and how to allocate
their pension wealth. The necessary decisions are daunting and are made more difficult by the
increased complexity of financial instruments; investors have to deal with a vast array of new and
sophisticated financial products. Saving decisions now require not only that individuals be informed
about their pensions, but also that they be knowledgeable about finance and economics.
Yet, there is mounting evidence that people are unfamiliar with even the most basic economic
concepts. For example, older workers in the United States and in other countries display little
knowledge of the power of interest compounding, the effects of inflation, and the workings of risk
diversification.1 Even among individuals in their prime earning years, there is evidence of low
numeracy and limited understanding of interest compounding.2 Knowledge of more advanced
financial concepts, such as the difference between bonds and stocks, the workings of mutual funds,
and basic asset pricing is even scarcer.3 These findings are not only widespread, but are particularly
severe among specific demographic groups, such as women, those with low education and low
income, and African-Americans and Hispanics. Individuals also display low debt literacy; only a little
more than one-third of respondents in a representative sample of the U.S. population can figure out
how quickly debt can grow when borrowing at an interest rate of 20 %. Similarly, only 36 % know
how to eliminate credit card debt by making small payments over time, and a meagre 7 % are able to
correctly pick the more advantageous method of payment out of two options.4 Finally, many
individuals participating in customised surveys report that not having enough knowledge about
finance/investing represents one of the most difficult elements of their saving decisions. Consistent
with this fact, many individuals consider themselves simple investors.5
Lack of information about pensions—one of the critical components of retirement wealth— is
also widespread. When comparing workers’ and employers’ reports about pensions, close to half of
older workers in the United States are found not to be able to correctly identify their pension plan
type.6 Workers misreport their pension plan type because they do not understand their pensions well,
and today’s workers need—at minimum—an adequate level of understanding of pensions in order to
be sure of funding them properly. Consistent with evidence of lack of information about major
components of retirement wealth, research shows that many workers do not plan for retirement, even
when they are only 5 to 10 years away from it. Lack of planning is not only widespread among older
generations, but it is also present among current Baby Boomers.7 In other words, irrespective of the
shift from DB to DC pensions and the increase in individual responsibility, many workers are making
little or no attempt to plan for retirement. The most recent data from the Financial Capability Survey in
the United States show that only 42% of workers and 51% of workers age 45-59 have ever tried to
figure out how much they need to save for retirement.8
Lack of information and lack of financial literacy provide fertile ground for financial errors. Left
to their own devices, employees may choose to invest their pension wealth in either too-conservative
or too-aggressive assets. An analysis of portfolio allocation from a large sample of investors offers
compelling evidence that portfolio allocation can be improved upon.9 Moreover, those who display
low literacy are more likely to have problems with debt, are less likely to participate in the stock
market, and less likely to plan for retirement.10 Those who do not plan, arrive at retirement with much
less wealth than those who do plan.11
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2. Financial literacy
One reason individuals do not engage in planning or are not knowledgeable about pensions or the
terms of their financial contracts is that they lack financial literacy. Bernheim (1995, 1998) was one of
the first to emphasise that most individuals lack basic financial knowledge and numeracy. Several
surveys covering the U.S. population or specific sub-groups have consistently documented very low
levels of economic and financial literacy. For example, Hilgert, Hogarth and Beverly (2003) examine
data from the 2001 Survey of Consumers, where some 1 000 respondents (ages 18–98) were given a
28-question true/false financial literacy quiz, covering knowledge about credit, saving patterns,
mortgages, and general financial management. Most respondents earned a failing score on these
questions, documenting widespread illiteracy among the whole population. Similar findings are
reported in smaller samples or among specific groups of the population (Agnew and Szykman, 2005,
and Moore, 2003).
Lusardi and Mitchell (2006) devised a special module on financial literacy for the 2004 HRS.
Adding these types of questions to a large U.S. survey is important not only because it allows
researchers to evaluate levels of financial knowledge but also and, most importantly, because it makes
it possible to link financial literacy to a very rich set of information about household saving behaviour.
The module measures basic financial knowledge related to the workings of interest rates, the effects of
inflation, and the concept of risk diversification. 12 Findings from this module reveal an alarmingly low
level of financial literacy among older individuals in the United States (50 and older). Only 50% of
respondents in the sample were able to correctly answer two simple questions about interest rates and
inflation, and only one-third of respondents were able to answer correctly these two questions and a
question about risk diversification. Financial illiteracy is particularly acute among the elderly, AfricanAmerican and Hispanics, women, and those with low education (a common finding in the surveys of
financial literacy).13
Lusardi and Mitchell (2007a) have also examined numeracy and financial literacy among the
Early Baby Boomers, who should be close to the peak of their wealth accumulation and who should
have already dealt with many financial decisions (mortgages, car loans, credit cards, pension
contributions, etc.). They find low rates of numeracy among these younger individuals. Lack of
knowledge of both basic and advanced financial concepts also emerges in the 2009 Financial
Capability Survey in the United States. Less than half of respondents answered two questions about
interest rates and inflation correctly and less than one-third answered those questions and a question
about risk diversification correctly. Less than 10 % of respondents are able to answer all five financial
literacy questions correctly (Lusardi, 2010).
Such results are not limited to the United States. Van Rooij, Lusardi and Alessie (2007, 2010)
examined financial literacy in the Netherlands using the same questions that were used in the U.S.
HRS. Like American households, Dutch households also exhibit fairly low levels of financial
knowledge. A study by the OECD (2005) and Lusardi and Mitchell (2007b) review the evidence on
financial literacy across countries and show that financial illiteracy is a common feature in many other
developed countries, including European countries, Australia, and Japan. These findings are echoed in
the work of Christelis, Jappelli, and Padula (2010), which uses data very similar to the U.S. HRS and
finds that most respondents in Europe score low on numeracy scales.
3. Financial education
Most large firms, particularly those with DC pension plans, offer some form of financial or
investment education programme. The evidence on the effectiveness of these programmes is, so far,
rather mixed.14 There is evidence of some positive effect of financial education on savings and
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pensions, but the type of education seems to matter. For example, Bernheim and Garrett (2003) find
that programmes that rely on print media (newsletters, plan descriptions, etc.) have generally no effect
on pension participation or contributions, even though the quality of financial information does matter
(Clark and Schieber, 1998). Only a few studies find that those who attend a retirement seminar are
much more likely to save and contribute to pensions.15 Clearly, those who attend seminars are not
necessarily a random group of workers. Because attendance is voluntary, it is likely that those who
attend have a proclivity to save, and it is hard to disentangle whether it is seminars, per se, or simply
the characteristics of seminar attendees that explain the higher savings of attendees that are shown in
the empirical estimates. However, Bernheim and Garrett (2003) argue that seminars are often
remedial, i.e., offered in firms where workers do little or no saving. In their work, they find that the
effect of seminars is concentrated in the first two quartiles of wealth and decreases or disappears at
higher values of wealth holdings, a finding difficult to rationalise simply by appealing to tastes for
saving.
Lusardi (2004) uses data from the Health and Retirement Study and confirms the findings of
Bernheim and Garrett (2003). Consistent with the fact that seminars are remedial, she finds that the
effect of seminars is particularly strong for those at the bottom of the wealth distribution and for those
with low education. Estimated effects are sizable for the least wealthy, for whom attending seminars
appears to increase financial wealth (a measure of retirement savings that excludes housing and
business equity) by approximately 18 %. Note also that seminars affect not only private wealth but
also measures of wealth that include pensions and Social Security wealth, perhaps because seminars
provide information about pensions and encourage workers to participate and contribute. This can be
important because, as mentioned before, workers are often uninformed about their pensions.
While these studies were able to single out the effects of financial education, one should also note
that a only small fraction of workers ever attend retirement seminars or work at firms that offer such
seminars. Thus, many workers are left untouched by such initiatives.
Other papers find rather modest effects of education programmes. Duflo and Saez (2003)
investigate the effects of exposing employees of a large not-for-profit institution to a benefit fair. This
study is notable for its rigorous methodology; a randomly chosen group of employees was given a
monetary incentive ($20) to attend a benefit fair, and their behaviour was compared with that of a
similar group in which individuals were not offered any incentives to attend the fair. This
methodology overcomes the problem mentioned before that those who attend education programmes
may already be inclined to save.
Findings from this study show that incentives to attend greatly increase participation in the fair.
Those who were provided with a monetary incentive were more than five times as likely to attend as
other employees. Interestingly, even those who were not offered an incentive but were in departments
with employees who did receive such an incentive were three times as likely to attend, indicating that
peer effects are at work in these types of decisions. After attending the fair, individuals who received
an incentive to participate were significantly more likely to start contributing to a Tax Deferred
Account retirement plan. However, the same was shown to be true for those individuals who did not
receive the financial incentive but who worked in departments where other employees received an
incentive, again suggesting that people may be highly influenced by the behaviour of those around
them.
In a series of papers, Clark and D’Ambrosio (2008) examined the effects of seminars offered by
TIAA-CREF at a variety of institutions. The objective of the seminars was to provide financial
information that would assist individuals in the retirement planning process. The authors’ empirical
analysis is based on information obtained via three surveys: participants completed a first survey prior
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to the start of the seminar, a second survey at the end of the seminar, and a third survey several months
later. Respondents were asked whether they had changed their retirement age goals or revised their
desired level of retirement income after the seminar.
After attending the seminar, several participants stated they intended to change their retirement
goals and many revised their desired level of retirement income. Thus, the information provided in the
seminars did have some effect on behaviour. However, it was only a minority of participants who were
affected by the seminars. Just 12 % of seminar attendees reported changes in retirement age goals, and
approximately 30 % reported changes in retirement income goals. Moreover, intentions did not
translate into actions. When interviewed several months later, many of those who had intended to
make changes had not yet implemented them. Another conclusion of the study was that the effect of
the seminar was rather different among demographic groups. For example, the study highlights rather
pronounced gender differences in saving behaviour. Before attending the seminars, women displayed
less confidence in their ability to attain their retirement goals than men. But women were substantially
more likely than men to increase their expected retirement age and to alter their retirement goals.
Thus, evaluating the effects of seminars on the whole population of participants may understate its
impact on specific groups.
It is not surprising that one retirement seminar does little to change behaviour. Few surveys on
the topic provide information on the number of seminars offered or the number that participants
attended, but it seems that participants often attend only once or a handful of times (Clark and
D’Ambrosio, 2008). But widespread financial illiteracy cannot be “cured” by a one-time benefit fair or
a single seminar on financial economics. This is not because financial education is ineffective, but
because these programmes are too small with respect to the size of the problem they are trying to
address. Evidence from financial education sessions offered in programmes aimed to promote
Individual Development Accounts (IDAs), which are subsidised savings accounts targeted at the poor,
show that multiple education sessions are effective in stimulating saving (Schreiner and Sherraden,
2007).
4. Increasing the effectiveness of financial education programmes
As highlighted in most of this author’s papers, saving is a complex decision and requires
knowledge well beyond what most employees seem to possess. One way to help people save is to find
ways to simplify saving decisions. This is the strategy analyzed by Choi, Laibson, and Madrian
(2009). They study the effect of Quick Enrolment, a programme that gives workers the option of
enrolling in the employer-provided saving plan by opting into a preset default contribution rate and
asset allocation. Unlike default options, where workers are automatically enrolled into a pensions plan,
in this programme workers have the choice to enrol or not, but the decision is much simplified as they
do not have to decide at which rate to contribute or how to allocate their pension assets.
When new hires were exposed to the Quick Enrolment programme, participation rates in 401(k)
plans tripled, going from 5 % to 19 % in the first month of enrolment. When the programme was
offered to previously hired nonparticipants, participation increased by 10 to 20 percentage points.
These are large increases, particularly if one considers that the preset default contribution rate was not
particularly advantageous: the contribution rate in the most successful programme was set at only 2 %,
with 50 % of assets allocated to money market mutual funds and 50 % allocated to a balanced fund.
Moreover, Quick Enrolment is particularly popular among African-Americans and lower income
workers who, as the research mentioned before shows, are less likely to be financially literate. Thus,
changes in pension design can have a significant impact on participation.
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Another approach intended to simplify the decision to save and, in addition, help employees
make an active choice is the one designed by Lusardi, Keller, and Keller (2008). They devised a
planning aid to be distributed to new hires during employee orientation. The planning aid displays
several critical features. First, it breaks down the process of enrolment in supplementary pensions into
several small steps, describing to participants what they need to do to be able to enrol in a plan online.
Moreover, it provides several pieces of information to help overcome identified barriers to saving,
such as describing the low minimum amount of income employees can contribute (in addition to the
maximum) and indicating the default fund that the employer has chosen for them (a life-cycle fund).
Finally, the planning aid contains pictures and messages designed to motivate participants to save.
The planning aid was designed after thorough data collection. The researchers devised a survey
asking explicitly about barriers to saving, sources of financial advice, level of financial knowledge,
and attractive features of a pension plan. Moreover, they conducted focus groups and in-depth
interviews (with both employees and human resources administrators) to shed more light on the
impediments to saving of employees at this institution. These data collection methods, which are
common in the field of marketing, are well suited to capturing the wide heterogeneity that exists
among individuals facing saving decisions. Even though the sample in this study is small, and hardly
representative of the U.S. population, it displays findings that are consistent with the evidence
described above. For example, many employees in this study stated that they consult only family and
friends when making saving decisions. Close to 40 % stated that they do not have enough knowledge
about finance/investing, and close to 20 % stated that they do not know where to start. Similar to the
findings of Clark and D’Ambrosio (2008) and Choi, Laibson, and Madrian (2009), women were found
to be more reactive to the saving programme. The programme was very successful; contribution rates
to supplementary retirement accounts tripled after the introduction of the customised planning aid.
The planning aid was further supplemented with new methods of providing information and advice
to employees. Given the evidence reported in previous studies of the importance of “peer effects” on
saving and low levels of numeracy among employees, particularly among women and those with low
income, videos were made available to employees. These videos provided testimonials of how other
employees in the same institution overcame barriers to saving. They also provided implicit suggestions
on how to save and how to invest retirement wealth. The targeted groups were women and low-income
employees, and only employees in these two groups were shown in the videos.16
This programme highlights several important considerations. First, while economic incentives, such
as employer matches or tax advantages may be useful, they do not exhaust the methods that can be
employed to encourage people to save. In fact, given the identified lack of information and financial
knowledge among the general population, there may exist other, more cost-effective, programmes that
can induce people to save. Second, employees are more prone to decision-making at specific times. As
discussed before, many people do not plan for retirement even at an advanced age, and it may be very
important to exploit “teachable moments.” For example, the start of a new job induces people to think
about saving. Thus, it may be particularly beneficial to target initiatives to employees who are newly
hired, as this is the group that is the most open to changes, since they are already in the process of
making decisions regarding saving and retirement planning. Third, to be effective, programmes have to
recognise the many differences that exist among individuals, not only in terms of preferences and
economic circumstances, but also in the level of knowledge, financial sophistication, and ability to carry
though with plans. In other words, relying on “one-size-fits-all” principles can lead to rather ineffective
programmes. Note that a planning aid can work in conjunction with other saving mechanisms. In other
words, a planning aid can supplement rather than substitute for existing (or new) initiatives to promote
saving. Combined with other initiatives, planning aids can significantly enhance employees’ retirement
security. Finally, this is not only an effective initiative but also one that is low-cost.
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5. Automatic enrolment into pensions
One way to stimulate participation and contribution to pensions is to automatically enrol workers
into employer-provided pension plans. Thus, rather than let workers choose whether or not to opt in,
employers enrol workers and let them choose whether or not to opt out of a pension plan. This simple
but ingenious method has been proven to be very effective in increasing pension participation. For
example, according to Madrian and Shea (2001), after a company implemented a change in its 401(k)
plan and automatically enrolled its new hires in the plan, pension participation went from 37% to 86%.
Sharp increases in participation have been documented in several other papers (Choi et al. 2004, 2006,
Thaler and Benartzi, 2004). Not only has the increase been very large but participation rates have
remained high for several years (Choi et al. 2004, 2006). Even legislators took notice of this
remarkable success, and the 2006 Pension Protection Act in the United States made it much easier for
firms to automatically enrol their workers in pension plans.
In principle, employers could automatically enrol workers in a pension plan but ask workers to go
to the Human Resources (HR) office and choose the contribution rate and the allocation of pension
assets. In fact, automatic enrolment programmes also specify the rate at which workers are enrolled
and how the pension assets are allocated. These are very difficult decisions. According to most
theoretical models of saving, the optimal saving rate depends on a long list of variables, including
individual preferences and expectations about the future, which are unknown to the employer. In
reality, automatic enrolment is rarely individual-specific. For example, in the firm analyzed by
Madrian and Shea (2001), the enrolment rate was set at 3% for every worker. This choice has
drawbacks since, in that particular firm, 6% of workers’ contributions received a 50 % employer
match. Thus, a 3% contribution fails to take advantage of part of the employer match.17 Irrespective of
this problem, not only did new hires stay at the 3% contribution rate, but other workers also changed
their contribution to 3%. Moreover, pension contributions were invested in money market mutual
funds. This is another problem since this type of default prevents workers from taking advantage of
higher returns in the bond or stock market. Nevertheless, most workers did not opt out of the
allocation in money market mutual funds (Madrian and Shea, 2001).18
The design of automatic enrolment programmes is very important. If the objective of employers
is to foster workers’ financial security after retirement, contribution rates and asset allocation have to
be chosen very carefully because workers tend to stay with what is chosen as the default. This includes
not participating in pensions if the default is to not enrol workers.
Several papers have recognised that default contribution rates that are too low may prevent
workers from accumulating enough retirement wealth, taking advantage of employer matchers, as well
as exploiting the tax-advantage of investing in pension assets. Thaler and Benartzi (2004) have
devised a programme - Save More Tomorrow (SMarT) - that incorporates not only automatic
enrolment but also increases in the default rate as the income of workers increases. The success of this
programme is remarkable. Workers enrolled in SMarT have achieved saving rates of more than 13%
versus an average of 5–6% for workers who did not enrol.
Similarly, VanDerhei (2007) shows that low contribution rates and investment in conservative
assets result in very low median replacement rates at retirement. For example, an automatic enrolment
programme with a 3% contribution rate and investment of pension assets in money market mutual
funds results in a median replacement rate for the lowest income quartile of workers of only 37%.
However, the replacement rate for this income group increases to 52% when the contribution rate is
increased to 6% and the default investment is changed to a life-cycle fund. Moreover, and most
importantly, workers seem favourable to default rates greater than 3%. As many as 44% of
respondents in the 2007 Retirement Confidence Survey state they would continue to contribute to
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pensions at a rate of between 6% to 10%, and 27% of respondents were willing to go for even higher
contribution rates. While these are self-reported figures, they suggest that increases in default
contributions are possible.
What explains the success of defaults? If individuals are poorly informed about their pensions,
lack basic literacy, and do not have good sources of financial advice to turn to, defaults are very useful
because they tell workers exactly what to do. In fact, they do even more: they not only provide potent
advice but also induce action, overcoming the problem that workers may fall prey to inertia and
simply not follow through on their intentions. Moreover, if there is any learning in saving, another
advantage of defaults is that they may help workers appreciate the value and perhaps ease of saving.
However, there are potential problems with defaults that need to be addressed. First, the success
of defaults should not be measured according to the rate of participation in pension plans, but
according to resulting improvement in household financial security. Because an active decision has not
been made and individuals have not had to calculate how much they need to save, they may not end up
with adequate resources for retirement. In fact, they may not learn much or become financially savvy.
This is a problem because there are no default enrolments (yet) in mortgage loans, credit cards, or
children’s education funds. Second, individuals have other motives to save, in addition to retirement.
We do not know yet how these other motives interact with defaults. For example, individuals may be
saving for children education or to accumulate a down-payment to buy a house. Most importantly,
workers may be carrying credit card debt or high-interest mortgages while enrolled in pensions. This
behaviour may detract from the benefit of increasing retirement savings. There is also evidence that
workers are borrowing from their retirement accounts. According to the U.S. Financial Capability
Survey, about 9% of individuals with self-directed retirement accounts have taken out a loan in the
past 12 months and about 5% have taken a hardship withdrawal (Lusardi, 2010).
6. Combining automatic enrolment and financial education
Contrary to what many tend to assume, automatic enrolment and financial education are not two
alternatives companies face when trying to boost employees’ pension contributions. In fact, they could
complement each other very well. As mentioned above, each initiative has significant drawbacks, but
combining them can go a long way toward overcoming those hurdles. Many behavioural economists
have argued that inertia and high planning costs delay workers from contributing to pensions, which
means programmes can be designed that make inertia work for, rather than against, workers.
Moreover, with automatic enrolment, nothing is taken away from the worker’s choice set. Any
employee can opt out of the plan at any time with the stroke of a pen.
Financial education alone has not been equally effective. It can take a long time for education and
financial advice to have an effect. Besides, not all workers will choose to attend financial education
sessions or look for financial advice. According to my research, though, those who are exposed to
financial education are more financially savvy, accumulate higher amounts of wealth, and make better
investment choices.
So why do we need both? There is no guarantee that workers will stay enrolled in the pension
plan in the long run. And the same inertia that makes workers stay in the plan initially may also
prevent workers from returning to the plan if they have opted out due, for example, to a temporary
shock. One of the lessons we have learned from the extensive literature on saving is that individuals
cannot be served well by one-size-fits all rule. Automatic enrolment combined with financial
education could be a solution, providing the type of differentiation that will allow each worker to
develop the plan he/she needs. Moreover, pension wealth is only a component of total wealth, and
most employees accumulate wealth beyond their pensions. There is no guarantee that the increase in
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pension saving is not simply offset by a decrease in private saving, especially if the new pension plan
gives the worker a false sense of financial security. That means employers’ contributions may end up
increasing current consumption instead of enhancing employees’ financial security. Moreover,
workers are confronted with a wide, ever-changing array of choices and complex financial instruments
for managing their non-pension wealth. Those who don’t have good financial skills may end up with
high cost mortgages, carry high credit card balances, and invest in poorly diversified portfolios. Those
choices may also eventually offset the wealth accumulated in 401(k) accounts. As Lusardi and Tufano
(2009a,b) show, financial decisions are inter-related and it is very limiting to study one decision only,
for example saving for retirement. Inadequate planning for other saving motives—college education
for their children or an emergency savings account—may also result in quick opt out when children do
go to college or an unexpected expense occurs. Eventually, that can limit the worker’s ability to
contribute to a pension and to exploit tax advantages and the employer’s match.
As much as we could try to circumscribe the choices, individuals will need to make active
decisions. Much of the academic research suggests that financial literacy is related to the choices that
people make, with less knowledgeable people making more costly decisions—even after controlling
for a host of other factors.
While the problems are many and the challenges are daunting, programmes can be designed to
change saving behaviour. We have a wealth of information to rely on, and that information should
make effective financial education increasingly possible. In the current economic environment it is
essential to equip consumers with the necessary tools to make informed financial choices. Some have
argued it is expensive to do financial education. In fact, both the existing research and the recent
financial crisis show that what is expensive is not to do financial education.
Notes
1
See Lusardi and Mitchell (2006) and the OECD (2005).
2
See Lusardi and Mitchell (2007a, 2007b).
3
See Lusardi and Mitchell (2009), and van Rooij, Lusardi and Alessie (2007)
4
See Lusardi and Tufano (2009a, 2009b).
5
See Lusardi, Keller, and Keller (2008)
6
See Gustman, Steinmeier, and Tabatabai (2008).
7
See Lusardi (1999, 2008) and Lusardi and Beeler (2007)
8
See Lusardi (2010).
9
See Mottola and Utkus (2008).
10
See Lusardi and Tufano (2009a), van Rooij, Lusardi, and Alessie (2007), and Lusardi and Mitchell (2006,
2008, 2009).
11
See Lusardi (1999), Lusardi and Beeler (2007), and Lusardi and Mitchell (2006, 2007a).
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III.5. FINANCIAL LITERACY AND THE SHIFT FROM DEFINED BENEFIT TO DEFINED CONTRIBUTION PENSION PLANS
12
For a discussion of the measurement of financial literacy and the extent of measurement error in financial
literacy data, see van Rooij, Lusardi and Alessie (2007).
13
See Lusardi and Mitchell (2007b) for a review.
14
See Lusardi (2010) for a detailed description of the issues involved in evaluating financial education
programs.
15
See Bernheim and Garrett (2003) and Lusardi (2004).
16
The videos are available on the following web site:
http://www.dartmouth.edu/~hrs/benefits/saving_for_retirement.html
17
Note, however, that when left to their own devices, many employees simply do not enroll in pensions, so
they do not exploit the employer match at all, if it is available.
18
As noted by Choi et al. (2004), many companies have chosen low contribution rates and conservative asset
allocations. For example, a survey by the Profit Sharing/401(k) Council of America in 2001 reports that
76% of automatic enrollment companies have either a 2% or 3% default contribution rate and 66% of
automatic enrollment companies have a stable value or money market default fund. See Choi et al. (2004)
for a discussion of these findings.
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Mitchell and Sylvester Schieber(Eds.), Living with Defined Contribution Pensions, University
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Evidence from a Survey of Households,” Journal of Public Economics, 87, pp.1487–1519.
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Behaviour: The Role of Financial Education,” in Annamaria Lusardi (ed.), Overcoming the
Saving Slump: How to Increase the Effectiveness of Financial Education and Saving Programs,
Chicago: University of Chicago Press, pp. 237-256.
Clark, Robert and Sylvester Schieber (1998), “Factors Affecting Participation Rates and Contribution
Levels in 401(k) Plans,” in Olivia Mitchell and Sylvester Schieber (eds.), Living with Defined
Contribution Pensions, Philadelphia: University of Pennsylvania Press, pp.69-97.
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Choi, James, David Laibson, and Brigitte Madrian (2009), “Reducing the Complexity Costs of 401(k)
Participation Through Quick Enrollment (TM),” in David Wise (ed.), Development in the
Economics of Aging, Chicago: University of Chicago Press, pp. 57-88.
Choi, James, David Laibson, Brigitte Madrian, and Andrew Metrick (2004), For Better or For Worse:
Default Effects and 401(k) Savings Behaviour, in David Wise (ed.) Perspective in the
Economics of Aging, Chicago: Chicago University Press, pp. 81–121.
Choi, James, David Laibson, Brigitte Madrian, and Andrew Metrick (2006), “Saving for Retirement
on the Path of Least Resistance, in Ef McCaffrey and Joel Slemrod (eds), Behavioral Public
Finance: Toward a New Agenda, New York: Russell Sage Foundation, pp. 304–351.
Christelis, Dimitris, Tullio Jappelli, and Mario Padula (2010), “Cognitive abilities and portfolio
choice,” European Economic Review, 54, pp. 18-38.
Duflo, Esther and Emmanuel Saez (2003), “The Role of Information and Social Interactions in
Retirement Plan Decisions: Evidence from a Randomized Experiment,” Quarterly Journal of
Economics, 118, pp. 815–842.
Gustman, Alan, Thomas Steinmeier, and Nahid Tabatabai (2008), “Do Workers Know about Their
Pension Plan Type? Comparing Workers’ and Employers’ Pension Information,” in Annamaria
Lusardi (ed.), Overcoming the Saving Slump: How to Increase the Effectiveness of Financial
Education and Saving Programs, Chicago: University of Chicago Press, pp. 47-81.
Hilgert, Marianne, Jeanne Hogarth, and Sondra Beverly (2003), “Household Financial Management:
The Connection Between Knowledge and Behaviour,” Federal Reserve Bulletin, 309-322.
Lusardi, Annamaria (1999), “Information, Expectations, and Savings for Retirement,” in Henry Aaron
(ed.), Behavioral Dimensions of Retirement Economics, Washington, D.C.: Brookings
Institution and Russell Sage Foundation, pp. 81-115.
Lusardi, Annamaria (2004), “Savings and the Effectiveness of Financial Education,” in Olivia S.
Mitchell and Stephen Utkus (eds.), Pension Design and Structure: New Lessons from
Behavioral Finance, Oxford: Oxford University Press, pp. 157–184.
Lusardi, Annamaria (2008), “Financial Literacy: An Essential Tool for Informed Consumer Choice?,”
Working
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OECD International Network on Financial Education.
Lusardi, Annamaria (2010), “Americans’ Financial Capability,” Report for the Financial Crisis Inquiry
Commission. http://fcic.gov/hearings/pdfs/2010-0226-Lusardi.pdf
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Brigitte Madrian, Olivia Mitchell, Beth Soldo (eds), Redefining Retirement. How Will Boomers
Fare?, Oxford: Oxford University Press, pp. 271–295.
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Lusardi, Annamaria, Punam Keller and Adam Keller (2008), “New Ways to Make People Save: A
Social Marketing Approach,” in Annamaria Lusardi (ed.), Overcoming the Saving Slump: How
to Increase the Effectiveness of Financial Education and Saving Programs, Chicago: University
of Chicago Press, pp. 209-236.
Lusardi, Annamaria and Olivia S. Mitchell (2006), “Financial Literacy and Planning: Implications for
Retirement Wellbeing,” Working Paper, Pension Research Council, Wharton School, University
of Pennsylvania.
Lusardi, Annamaria and Olivia S. Mitchell (2007a), “Baby Boomer Retirement Security: The Role of
Planning, Financial Literacy, and Housing Wealth,” Journal of Monetary Economics, 54, pp. 205–224.
Lusardi, Annamaria and Olivia Mitchell (2007b), “Financial Literacy and Retirement Preparedness.
Evidence and Implications for Financial Education,” Business Economics, January 2007, pp. 35–44.
Lusardi, Annamaria and Olivia Mitchell (2008), “Planning and Financial Literacy: How Do Women
Fare?,” American Economic Review, 98(2), pp. 413-417.
Lusardi, Annamaria and Olivia Mitchell (2009), “How Ordinary Consumers Make Complex Economic
Decisions: Financial Literacy and Retirement Readiness,” NBER Working Paper, 15350.
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Overindebtness”? NBER Working Paper n. n 14808.
Lusardi, Annamaria and Peter Tufano (2009b), “Teach Workers about the Perils of Debt,” Harvard
Business Review, November 2009, pp. 22-24
Madrian, Brigitte, and Dennis Shea (2001), “The Power of Suggestion: Inertia in 401(k) Participation
and Savings Behaviour,” Quarterly Journal of Economics, 116, pp. 1149–1525.
Moore, Danna (2003), “Survey of financial literacy in Washington State: Knowledge, behaviour,
attitudes and experiences.” Technical report 03-39, Social and Economic Sciences Research
Center, Washington State University.
Mottola, Gary, and Stephen Ukus (2008), “Red, Yellow, and Green: Measuring the Quality of 401(k)
Portfolio Choices” in Annamaria Lusardi (ed.), Overcoming the Saving Slump: How to Increase
the Effectiveness of Financial Education and Saving Programs, Chicago: University of Chicago
Press, pp.119-139.
Organisation for Economic Co-Operation and Development (OECD). 2005. Improving Financial
Literacy: Analysis of Issues and Policies, Paris, France.
Schreiner Mark and Michael Sherraden (2007), Can the Poor Save? Saving and Asset Building in
Individual Development Accounts, New Brunswick, NJ: Transaction Publishers.
van Rooij, Maarten, Annamaria Lusardi and Rob Alessie (2007), “Financial Literacy and Stock
Market Participation,” NBER Working Paper n. 13565.
van Rooij, Maarten, Annamaria Lusardi and Rob Alessie (2010), “Financial Literacy and Retirement
Planning in the Netherlands,” mimeo, Dartmouth College.
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
Chapter 6
Auto-Enrolment in Private, Supplementary Pensions in Italy
by
Ambrogio Rinaldi*
This chapter discusses the Italian experience in developing its system of private, supplementary
pensions, as a case study of the implementation of nation-wide auto-enrolment mechanisms; in the
discussion, attention is devoted to pension awareness issues. The reasons for the limited success of
auto-enrolment in Italy are summarised. Besides the importance of country-specific structural issues,
the need for an overall, coherent, pension strategy is underlined, together with a consistent use of the
different policy instruments available: not only in order to achieve the desired membership targets, but
also as a prerequisite for effective awareness campaigns and education efforts. In addition, the chapter
stresses the need for a balance of responsibilities between the individual, the State, and intermediate
bodies (such as social partners), with appropriate default options that should back-up the individual
when he/she is unable or unwilling to choose.
*
Pension Funds Supervision Commission (COVIP), Italy.
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
1. Introduction
Auto-enrolment (i.e. the automatic enrolment of workers in a private pension plan, with the
individual allowed to opt out) is gaining popularity as a mean to increase participation in
supplementary, defined contribution, pension plans1.
Exploiting people’s inertia and overcoming procrastination, auto-enrolment is seen as a nice
middle course between fully voluntary arrangements, where individuals are often not able to take
appropriate, informed decisions, and compulsory mechanisms, which in principle are distortive of
individuals’ preferences and may be politically unfeasible.
For individual pension funds, auto-enrolment has been applied for many years, and it is often
encouraged by regulation (e.g. in the U.S.). More ambitiously, in a few countries policy makers are
considering to introduce auto-enrolment at nation-wide level. For example, the U.K. and Ireland are
planning to introduce nation-wide auto-enrolment programmes in the near future. Therefore, it is
interesting to put attention on the experience of Italy, one of only two countries2 that -to the
knowledge of the author- have already introduced nation-wide auto-enrolment programmes.
This chapter begins with background information about the development of the Italian private
pension system, and in section 3 describes the way the auto-enrolment programme was designed and
implemented. The results in terms of membership are presented in section 4, while section 5 is
devoted to a discussion of the factors that have led to the limited success of the programme. Section 6
presents some evidence on the level of financial literacy and pension awareness of Italian workers,
together with their link with pension fund membership. Section 7 draws conclusions and identifies
issues that are worth considering in the implementation of future nation-wide, auto-enrolment
programmes.
2. Historical background
At the beginning of the nineties, the diffusion of supplementary pension funds in Italy was very
limited: only about 700 000 members, or 3% of workers, were enrolled, mostly high salary workers
(managers of large companies, financial sector employees). Indeed, the Italian public pensions (based
on an earnings-related, pay-as-you-go system) were generous, and there was no perceived need for
supplementary pension funds directed at all workers.
Still, demographic trends, public budget imbalances and the long-term slowdown of the Italian
economy were making the path of public expenditure for pensions clearly unsustainable. With the
constraints imposed by participation to the process of European monetary convergence and finally
unification, from 1992 major reforms of public pensions were introduced, including (in 1995) the
introduction of the so-called notional defined contribution system. The reforms stabilised the long
term public expenditure on pensions; they also significantly reduced future benefits, albeit with a long
transition phase.
As a result, the need for a diffusion of pension funds among all workers (and especially the
young) became clear. In several stages from 1992-3, a comprehensive regulatory and supervisory
framework for supplementary pension funds was introduced. Its main features included:
•
136
An overarching favour for the regime of defined contribution, the only one admissible for
new members and schemes instituted with the new legislation; the defined benefit regime
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
could therefore survive only for the funds already in place before the reform, and only for the
workers that were already enrolled in them3.
•
For the employed private-sector workers, a leading role assigned to “contractual”, usually
industry-wide pension funds, set up trough labour agreements and governed as stand-alone,
non-profit organisations by representatives of workers (de facto the trade unions) and
employers4 on a parity basis.
•
Voluntary membership for individual workers.
•
In the case an employee decided to enrol, the obligation for the employer to pay in the
pension fund the contribution rate set by labour agreements (usually around 1-1.5% of gross
wages), with a matching contribution by the employee; in addition, the flow of TFR
(Trattamento di fine rapporto, a sort of deferred salary)5 would be also paid into the fund, in
its entirety for new workers (those employed after the new legislation was introduced), and
usually only partially for older workers (according to the relevant labour agreements).
•
The possibility for financial institutions (banks, insurance companies, asset management
companies) to set so-called “open pension funds”, collective investment vehicles having an
explicit retirement purpose and open in principle to all workers, although mainly directed to
the self-employed and to workers employed in sectors where no “incumbent”, contractual
pension fund is instituted6.
With the introduction of the new framework, the shift of responsibility and risks from the State to
individual workers was been significant. In the “old” system, pensions are calculated as a function of
individual earnings, and are (in principle) independent both of future macroeconomic developments
and the performance of financial markets. In the new system, the public, first pillar component is tied
to the growth rate of the Italian economy, as well as to the development of life expectancy; the private,
second (and third) pillar component is a direct function, besides of life expectancy, of the behaviour of
financial markets, and of several decisions that the individual is asked to take regarding membership,
choice of fund, contribution rates, investment options.
Overall, the risk that individuals are set to bear, in terms of a lower than expected replacement
rate at retirement, have increased from almost nil to meaningful. Their responsibility in taking
appropriate decisions regarding their pensions has increased substantially.
Indeed, temporary mitigations of the shifting of risk to individuals were in place for the employed
workers regarding their private, supplementary pensions. First, individual employees were in practice
discouraged from opting out from their incumbent, contractual pension fund, by choosing an open
pension fund: in doing so they would have lost the employer’s contributions and significant fiscal
incentives. Second, for several years contractual pension funds offered only one investment line, and
therefore no decision regarding investments was required to members. Members were anyway
requested to make their choice regarding membership and, sometimes, contribution rates7.
In terms of public policy, it would be expected that the introduction of the new system -with
greatly increased responsibilities awarded to individuals- would have been accompanied by a
significant effort to inform the population at large (and the more so the young, those most affected by
the reforms), and to empower individuals to take informed decisions regarding their pensions.
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
In the years that followed the reform, these efforts were limited and uneven. There was no major,
government-run, information campaign aimed at developing awareness about the decrease of public
pensions; this issue was considered per se as politically tricky. Communication efforts did occur at
the level of individual companies and sectors of the economy, by initiative of both employers and the
trade unions, in connection with the institution of contractual pension funds. But there were large
differences across funds, as a function of the characteristics of their industry: where the typical size of
companies was large, the communication about the new system and the choices available to individual
workers was often good, and the results in terms of membership followed; where the industry structure
was highly fragmented and the productive units small, communication was poorer and membership
rates stayed low.
In the aggregate, pension fund membership increased rapidly in the early years of the new
system, when many contractual funds were launched, but slowed down since 2001, in particular for
employed workers. At the end of 2003, pension fund members did not exceed 2.6 million, about 12 %
of the work force.
While the Italian pension fund system looked well-built in structural terms, it was clear that it
needed a strong push, if it had to become an essential component of the Italian pension framework.
More specifically, it became evident that relying on voluntary membership and on raising the
awareness of the need for supplementary pensions was not going to increase membership as quickly as
desired.
3. Nation-wide auto-enrolment: “The TFR reform”
In 2004-05, after a wide public debate, the automatic enrolment in private pension funds of all
employed workers of the private sector was decided, together with further fiscal incentives;
adjustments of public pension rules, aimed at postponing the retirement age and reducing expenditure,
were also introduced8.
The automatic enrolment would be based on the payment into the pension funds of the future
flow of the TFR (for this reason the initiative has been often called “the TFR reform”). Individual
workers would be given a period of six months in order to decide whether to refuse this arrangement
(and consequently the automatic enrolment with the pension funds); in this case, they would keep their
rights regarding the TFR as in the past. For the future, the same mechanism would apply to all firsttime employees, with their period of six months starting together with their first job. The pension fund
receiving the TFR was generally indicated by labour agreements9.
As the TFR had been serving until then not only as deferred salary for the employees, but also as
a source of cheap financing for the employers, measures were envisaged (based on public guarantees)
in order to ensure that additional banking loans would be made available for firms at a low cost.
As regards the “default” investment line in which the money coming from the TFR would be
automatically invested, the law stated that it had to guarantee the return of the contributions paid plus a
yield “comparable” to the revaluation rate of the TFR (see footnote 6).
Several other new rules were introduced with the purpose of increasing the scope for competition
in the field of plans directed to private-sector employees10. In particular, open pension funds were
allowed to host occupational schemes for individual companies also in industries where a contractual
fund was in place; additionally, constraints and fiscal rules were removed that in practice did not allow
individual workers to freely select the open pension fund (or the insurance-based personal scheme)
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
where they wished to direct the flow of TFR – although the payment of the employer’s contribution
into the fund selected by the employee would still be conditioned to the agreement of the employer.
Originally, the implementation of automatic enrolment was planned for the first half of 2008.
Then, after the general elections in May 2006, the new Government that came into power took the
view that the implementation had to be shifted earlier, to the first half of 2007.
There was another important change: firms with 50 or more employees would be obliged to
transfer in favour of the Treasury the flows of TFR that workers did not want to be paid into the
pension funds (thus keeping untouched their rights regarding the TFR). This arrangement –besides
generating additional revenues for the public budget – would make the decision of their employees
neutral to the larger firms (except than for the payment of the employer’s contribution), as they would
be obliged to pay out the flow of TFR anyway11. On the other hand, firms with less than 50
employees would not be in such a neutral position vis-à-vis the decisions of their employees, also
considering that the measures that should have allowed them to get additional bank financing were not
put forward.
The final, formal decisions were taken only in late 2006, and a few days later the “semester”
began in which employees had to consider whether to refuse the transfer of their TFR into the pension
funds.
With little time available, a “rush” phase took place for all the actors involved.
COVIP, the pension regulator/supervisor, had to re-draft all secondary regulations, to make them
consistent with the new law. This included a special emphasis on the information to be given to actual
and potential members, in order to ease comparisons between schemes and foster competition. A new,
comprehensive information document was set up, imposing the same format to all kinds of pension
schemes; a synthetic indicator of all charges was introduced.
All pension providers (contractual pension funds as well as financial and insurance companies)
had to re-organise their offer of pension plans to adapt to the new rules, and prepare all the necessary
documents to apply for approval from the regulator. A bunch of new initiatives was also put forward,
in particular contractual funds in industries where they were still missing. Subsequently, COVIP had
to consider all the applications and grant the approvals and the new licenses in time to allow the funds
to collect the new members before the semester elapsed.
The employers were requested to inform their employees of the auto-enrolment mechanism,
specifying the “default” occupational fund in which they would be enrolled, and of the possibility to
opt-out. In particular, they were requested to ask each and every worker to compile a form (issued by
the competent ministries) reporting whether or not he/she accepted the transfer of the TFR into the
pension fund.
Besides these formal requirements, all involved actors had to face with the major task of
communicating to the workers, in the little time available, the contents of the reform, the implications
of the auto-enrolment mechanism, and the options available to them.
The Ministry of Labour ran a major campaign directed to the public at large to increase
awareness about the reform. All media were used, with special emphasis on TV and radio; a dedicated
web site was created (jointly with COVIP): www.tfr.gov.it; a call centre was set up; special events
(such as two “TFR days”) were organised. The effectiveness of the campaign was monitored both
during and after it was conducted12.
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
In the workplace, many, capillary communication initiatives (campaigns, meetings, etc.)
were organised by employers and trade unions, often together with the relevant contractual
funds. Financial and insurance companies invested in advertising and other marketing
initiatives in order to promote their pension products; they targeted not only individuals, but
also small and medium companies, in the attempt to develop business in occupational
pensions.
4. The results
Net of certain categories, such as short-term and seasonal temporary workers, as well as
housemaids, the reform involved about 12.2 million private-sector employed workers, and several
hundreds of thousands of companies. When the semester elapsed at the end of June 2007, it took some
time to clarify the position of many workers; a complete and reliable picture of the results become
available only at the end of 2007.
At that date, around 4.6 million workers were counted as enrolled in supplementary pension
plans, or about 20% of all workers, with an increase of 1.4 million with respect to end-2006, before the
implementation of auto-enrolment. The increase was concentrated among the employed workers of
the private sector (with an increase of 1.2 million, they reached 3.4 million members at end-2007 –
about 27% of their total).
Figure 6.1. Pension fund members before and after auto-enrolment
Source: Commissione di Vigilanza sui Fondi Pensione (COVIP)
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
Overall, the increase was significant, but certainly not satisfactory and at odds with previous
experiences in other contexts and suggestions coming from behavioural economics. The more so, the
great majority of new members came out from explicit adhesions, and not from the auto-enrolment.
Only a number of workers estimated at 67 000 were automatically enrolled, around 5% of new
members among private-sector workers.
The reasons for such outcome are discussed in the next section. Before doing so, it is useful to list
some other information about the results:
•
Membership rates continued to be very diverse across sectors and funds – mainly depending
on the firm size and the presence of trade unions – confirming and even reinforcing the
differences that were present before the implementation of auto-enrolment.
•
Large differences in membership rates by gender, age group and geographic area, already in
place before the reform, were also confirmed: membership continued to be higher in
Northern and Central Italy, among men, and the older workers – and lower in the South and
the Islands, among women, and the young. In synthesis, membership rates in supplementary
pension funds continued to be much higher among “stronger” workers, likely to have more
stable jobs, higher salaries, and higher public pensions when they retire.
•
In the following two years, membership results did not improve much. At end-2009, total
membership was slightly over 5 million workers13. Moreover, it is worth noting that the bulk
of the new adhesions in 2008-09 were in favour of individual plans (mainly PIPs, the
insurance-based personal plans – thanks to the effective sales network of insurance
companies), while new adhesions to contractual pension funds were limited at about 50 000,
with many funds that experienced no further growth or even reductions in membership. On
the other hand, the role of auto-enrolment increased in relative terms: from 5% of new
adhesions of private sector workers in 2007 to 30% in 2008 and 38% in 2009.
5. Explaining the results
Structural factors
Several structural factors contribute to explain the limited success of auto-enrolment in Italy.
First of all, disposable income for the average employed Italian worker is not high, mainly because
of a large difference between cost of labour and net wages, due to income tax and social contributions14.
In particular, total (employers’ and employees’) compulsory social security contribution rates stand at 33
% of gross wages. Given the competitive pressures to which the Italian economy is exposed, it is not
clear whether there is room for additional resources to be allocated to pensions.
Second, vis-à-vis conservative investment options, the TFR is a strong competitor as a saving
vehicle: it offers a risk-free rate of return that, although low in nominal terms, is still clearly positive in
real terms, in the current low-inflation environment15.
Third, the TFR has historically been an important source of cheap financing for employers. As
mentioned above, the TFR reform has cancelled this possibility for firms with 50 or more employees.
Smaller firms though (so important in the Italian economy)16 are not neutral vis-à-vis the decision of
their employees, because they still keep as a liability in their balance sheets the TFR of employees that
refuse to enrol in the pension funds (besides not paying the contribution set by the relevant labour
contract). Given the tight relations in place within small firms, employers may have influenced the
choice of their workers regarding whether or not to enrol.
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
Fourth, the financial and economic crisis, although might not have had an effect on enrolment in
the first half of 2007, certainly has made things more difficult in 2008 and 2009. The crisis has
tightened liquidity constraints for potential members and for smaller firms, and has increased risk
aversion, hindering confidence in pension plans investing in financial markets.
Implementation factors
Besides the factors listed above, that are difficult to overcome as they are embedded in the
characteristics of the Italian economy, there are a few aspects of the implementation of auto-enrolment
that still may be seen as sub-optimal; these aspects are of major interest in order to derive useful hints
for the implementation of similar programmes in the future.
First of all, the efforts to create pension awareness were insufficient, given the low level of
financial literacy across Italian workers as well as their scarce knowledge of the implications of
pension reforms of the nineties17. In particular, after the adoption of the notional defined contribution
system individual workers were not informed of the amount of the annuity that they could reasonably
expect to receive: no such a thing as the Swedish “orange envelope” was distributed to Italian
workers18.
The rescheduling of auto-enrolment one year earlier certainly did not help. Important aspects of
the implementation were defined just before or even after the “semester” began. Most of the
information campaign run by the Ministry of Labour was concentrated in the last part of the semester.
Most of contractual pension funds and financial and insurance companies offering open plans
completed the review of their products and the fulfilled the requirements for the necessary
authorisations only a few weeks before the semester elapsed.
In addition, there were two aspects of the communication strategy that may be seen as critical.
First, regarding public pensions, authorities were reluctant to convey a clear message regarding
the dimension of the reduction that workers should expect. The reason for this was that certain aspects
of the rules to be applied were still open to negotiations between the Government and the social
partners. In particular, the periodic revision of coefficients that would transform into an annuity the
notional capital accrued at retirement – revision needed in order to keep up with increased life
expectancy and maintain the system in actuarial equilibrium – although already written in the law, was
put in doubt for some time. This uncertainty was reflected in the communication that was set up.
A second, possibly trickier, aspect of the communication strategy that is worth discussing
concerns specifically the auto-enrolment process. More than explaining the reasons why the option
that would automatically apply should be considered appropriate, emphasis was put mainly on the
“importance to choose now”19; i.e. on the need for each worker to assess carefully (and rapidly) the
options available. Somehow, the communication campaign looked more consistent with a framework
where enrolment is fully voluntary and requires each individual to explicitly express the willingness to
become a member, than with a more “paternalistic” framework where authorities are truly convinced
that an appropriate default option has been defined, and individuals are encouraged to take it for good
or opt out only in special circumstances.
Specific details of the implementation reinforced this approach, such as the requirement for
employers to ask every employee to compile a form where to indicate whether he/she accepted the
default option, or wanted to opt-out (clearly, asking to fill such a form would have been really
necessary only in this latter case).
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
As a result, it is likely that the prevalent message conveyed to the workers was that of a neutrality
of public bodies with respect to the options offered20. Such a message, together with the irreversibility
of the choice in favour of paying the TFR into the pension funds (another aspect that might be
criticised) may have induced uncertainty, anxiety, and procrastination of choice among workers.
Actually, it is reported that the preference for opting out and keeping the TFR increased while the
campaign was run.
Figure 6.2: Contractual pension funds: membership rate and firm size
Source: Commissione di Vigilanza sui Fondi Pensione (COVIP)
The way the “default” option was designed also contributed to the low number of automatic
enrolments (i.e. “silent” enrolments, as they have been usually labelled in Italy). Indeed, the default
option set up by law was (in most cases) not optimal from the side of the employee, neither as
regards contributions nor the investment profile.
Indeed, labour contracts applicable to most employed workers provided for an employer’s
contribution (usually in the range of 1-1.5% of gross wages) conditional on the payment into the fund
of a matching contribution by the employee. Where the individual employee remained silent, only the
TFR would have paid into the pension fund, with the employers’ contribution becoming a deadweight
loss – a clearly inferior option for most workers (possibly with the exception of those with severe
liquidity constraints, that impeded them to pay for their matching contribution).
As regards the investment profile, a very conservative default option was set up by law: a
guaranteed line of investment, ensuring the return of paid contributions, plus a yield “comparable” to
that of the TFR. However, taking into account the pressure to keep costs low, and the historically low
interest rates offered by high-quality bonds, this investment profile offers very limited prospects to
perform significantly better than the TFR. Moreover, no recognition was given to the different time
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
horizons available to workers of different age, and the selected default option may be considered
unsuitable especially for the young.
Again, the message implicit in the default options set up by law was not of confidence in the
ability of pension funds to provide in the long run, investing workers’ money on the financial markets,
a superior performance to that ensured by the TFR.
It is worth noting that, despite the sub-optimal arrangements made in terms of default options and
awareness campaign, in a few cases employers and trade unions were indeed able to offer a more
positive message and obtain significant results in terms of membership. As shown in the following
figure, company funds and a bunch of industry-wide funds have reached satisfactory membership
rates, in many cases around and over 80%21.
A specific survey run for one of these successful funds22 suggests that an important role was
played by the information flow among employees that is possible in large plants (a sort of “cafeteria
effect”). The figure suggests that, at the level of individual funds, two equilibria emerged: a good one,
where communication was good, and membership high; and a bad one, where communication was
poor (and possibly distorted by the conflict of interest occurring on small employers regarding the
destination of the TFR of their employees – see above) and membership low.
6. Some evidence on financial literacy and pension awareness among Italian workers
Before drawing conclusions on the Italian experience with auto-enrolment that may be useful for
designing other programmes in the future, some evidence is reported on financial literacy and pension
awareness; the evidence was collected through a survey in June 2008, a few months after the
implementation of auto-enrolment and before the blowing-up of the financial crisis later in that year.
The survey was commissioned by COVIP, in order to better understand the factors influencing
workers’ choices regarding pension fund membership. It was focussed on employed private sector
workers, and run by telephone interviews with a sample of about 1000 respondents.
Some descriptive statistics of the results are reported below, focussing on the differences between
respondents that declare to have enrolled in a pension plan and the others23.
We asked five questions about financial literacy, replicating the questions suggested by Prof. A.
Lusardi and used in surveys run in many countries.
The five questions asked on financial literacy show results in line with those found for other
countries for the sample of employed workers. For each of the questions, correct answers are slightly
higher for workers who declare to be members of supplementary pension plans.
It is worth noting that pension plans members showed a relatively higher understanding of the
effects of diversification on risk. One may also note the very few correct answers received by the
question on the relationship between the price and the yield of bonds.
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
% of correct replies
Questions on financial literacy
entire sample
pension fund
members
not pension
fund members
Compound interest rate
53,5%
59%
52%
Inflation perception
48,5%
53%
47%
Difference between stocks and bonds
49%
55%
47%
Effect of diversification on risk
53%
61%
51%
11,4%
12,9%
11%
981
224
757
Relationship between the price and the yield of
bonds
Sample size
Another set of questions was asked, regarding the awareness of workers on some key features of
the reform of the public pension system.
Also in this case, replies show a positive correlation between “pension awareness” and the
decision to adhere to pension funds. However, the overall level of awareness looks low (although
international comparisons are not readily available in this case).
% of correct replies
Questions on awareness of reform
of public pensions
entire
sample
pension fund
members
not pension
fund
members
Your benefits will depend: only on the contributions
you pay / only on your salary as an active worker /
on both / do not know
28.5%
32.6%
27.2%
In the PAYG system (“sistema a ripartizione”),
contributions paid today are used for: paying current
retirees / paying future benefits to current active
workers / both / do not know
37.2%
44.6%
35%
981
224
757
Sample size
It is worth noting that preliminary results of econometric analysis through probit models show a
possibly stronger effect of pension awareness vs. financial literacy on the decision to adhere to pension
funds. This may be a useful finding for policy purposes, as may help define priorities in information
and awareness campaigns.
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
7. Conclusions
This chapter has discussed the Italian experience in developing its system of private,
supplementary pensions, as a case study for the implementation of nation-wide auto-enrolment
mechanisms, devoting attention to pension awareness issues.
Exploiting people’s inertia and overcoming procrastination, auto-enrolment is (increasingly
often) seen as a nice middle course between fully voluntary arrangements and compulsory
mechanisms.
Fully voluntary systems rely heavily on the ability of individuals to take appropriate, informed
decisions; given the complexity of pension products, this ability requires a degree of financial literacy
and pension awareness that is difficult to achieve. On the other hand, mandatory solutions, in
principle, are distortive of individuals’ preferences and may be politically unfeasible.
Auto-enrolment is thus inspired to a form of soft “paternalism”, that recognises that individuals
need to be “nudged” in the right direction, while sees as culturally unacceptable the outright
imposition of “one size fits all” mechanisms. Auto-enrolment should be seen as a complement, rather
than a substitute, of education efforts aiming at empowering people to take the decisions that best suit
them.
Though, auto-enrolment may be tricky to be put in practice, as the Italian experience clearly
shows.
Besides the importance of country-specific structural issues, this chapter wishes to underline the
need to insert auto-enrolment in a comprehensive policy strategy encompassing all components of the
pension system. In this framework, all the policy instruments regarding different aspects of pensions
should be used consistently: not only in order to achieve the desired membership targets, but also as a
prerequisite for effective awareness campaigns and education efforts.
A consistent policy strategy is needed to communicate to the public at large a truly convincing
message about the reasons to foster the role of supplementary funds, to increase membership, to
achieve the desired size of contributions, to invest them appropriately. All instruments available
(auto-enrolment, default options, financial education, information to members, regulation, competition
policy, etc.) have thus to be used consistently, in order to exploit their potential complementarities24.
As an important starting point, it has to be ensured that the framework of public pensions is
sufficiently stabilised and that clear and comprehensive information can be (and is) supplied in order
to make people aware of its evolution both in the short and in the long run. This is all the more
essential when important reforms of the system are introduced.
A second major point to make is the importance of appropriate default options that back-up the
individual when he is unable or unwilling to choose; default options are important not only because
they gently force individuals to “take” the right decisions, but also as complements to education and
information efforts, because they convey information and advice in a simple and effective way.
A third, final point has to do with the need to ensure an appropriate balance of responsibilities
between the individual, the State, and the intermediate bodies (such as social partners) in the allocation
of decision to be taken regarding pension issues. For example, while the overall design of the autoenrolment system may well be designed by law at nation-wide level, the principle of subsidiarity may
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
suggest that employers and social partners are best fitted in order to set the specific default options
regarding contribution rates and investments.
In any case, it is important that the individuals are not left alone facing many difficult choices
regarding their pensions; a consistent policy strategy and an appropriate mix of instruments, together
with information and education efforts, should be put at work. A sensible balance of appropriate
design, intelligent nudging, empowerment efforts, and freedom to choose is most likely to deliver the
pension solutions that are most likely to suit best the great majority of workers.
Notes
1
Vice versa, the logic of defined benefit plans is naturally linked to universal membership.
2
New Zealand has also in place, since July 2007, an auto-enrolment program (KiwiSaver); differently from
the Italian case, automatic enrolment applies to all workers aged 18-64 every time they enter a new job.
The program is seen as quite successful, as in June 2010 it already enrolled more than 1.5 million
workers.
For more information, see the New Zealand’s Government specialised website
www.kiwisaver.govt.nz.
3
In principle, defined benefit funds dedicated to the self-employed would still allowed to be established;
however, no fund of this kind has been instituted under the new legislation. Besides, in the case of severe
technical imbalances, the old funds were allowed to apply for the authorisation to continue to accept new
members in the defined benefit regime; only three funds did apply and received the authorisation.
4
In practice, for employed workers, industry-wide funds instituted by national labour agreements were
given, within their sector, a sort of monopoly vis-à-vis the so-called open pension funds (see infra).
5
The flow of TFR (Trattamento di fine rapporto) is set by law at 6.91% of gross salary, net of a residual
percentage that is not accrued in favour of the individual workers. The TFR is accrued by employers as a
debt to their workers, and is paid at termination of employment. It carries an annual yield of 1.5% plus ¾
of the inflation rate. Since the introduction of the new legislation, the TFR is expected to be the major
source of financing of pension funds in Italy.
6
Later, in 2001, insurance-based individual plans (so-called PIPs) were introduced.
7
Other kinds of choices, such as that to be taken at retirement between an annuity or a lump-sum, are not
discussed here.
8
Law 23.8.2004 n. 243 delegated the Government to introduce the new rules for supplementary pension
funds. The Government approved the new rules at the end of 2005, with the legislative decree 5.12.2005,
n.252.
9
A residual pension fund was set up with INPS (the main Italian social security agency), in order to allow
the automatic enrolment of workers of sectors where labor contracts did not provide for any fund.
10
The new legislation aimed also at strengthening supervision, and entrusted COVIP (the specialised
pension regulator/supervisor) with additional powers, in part previously assigned to other supervisory
bodies.
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III.6. AUTO-ENROLMENT IN PRIVATE, SUPPLEMENTARY PENSIONS IN ITALY
11
The transfer is made to an account set up with INPS, the main Italian social security agency, in favour of
the Treasury. The sums collected count as current revenues in the public budget, accordingly to the
corresponding liabilities (that will be recorded as expenses when they will occur).
12
See Ministero del Lavoro, “Monitoraggio sulla campagna di comunicazione sul TFR”, PowerPoint
presentation available on the website www.tfr.gov.it .
13
At end 2009 Italian supplementary pension plans accumulated resources for 73 billion Euros, about 4% of
GDP.
14
According to OECD, and taking as a reference average-earning unmarried workers with no children, in
2009 Italy ranked 22nd among OECD countries for net, in the pocket, wages (with about 15.900 euro) –
while it ranked 19th (with about 29.600 euro) for the average cost of labour of the corresponding worker.
See OECD (2009), “Taxing wages”.
15
It is worth noting that the revaluation mechanism of the TFR currently in place (see footnote 6) was set in
1982, when the annual inflation rate in Italy was in the region of 10%, implying a revaluation rate for the
TFR significantly negative in real terms.
16
More than half the workers of the private sector are employed in firms with less than fifty employees.
17
See the following section for some evidence based on surveys of Italian workers that were run in 2008,
the year after the implementation of auto-enrolment.
18
At the time of writing this chapter, no “orange envelope” has yet been distributed to Italian workers,
although plans to do so have been announced.
19
“L’importanza di scegliere ora” was the slogan most frequently used in the campaign.
20
One could even argue that the competent authorities were ambivalent with respect to the willingness to
achieve a truly high enrolment rate, as for larger firms the TFR not paid into pension funds was set to
become a revenue for the Treasury. It is worth noting that in 2008 the flow of TFR paid to the Treasury
reached the significant amount of 5.3 billion Euros.
21
Also at regional level there are positive experiences (e.g. Trentino Alto-Adige), that have led to higher
membership rates than the nation-wide average.
22
The survey was run among the members of Fonchim, the nation-wide fund for chemical industry (and the
first one to be instituted under the new legislation), that at end-2007 reached a membership rate above
80% with over 160 000 members. The largest fund in Italy is Cometa, the nation-wide fund for the steel
industry, which at end-2007 reached a membership rate slightly below 50%, with more than 470 000
members. At end-2009 membership for both funds was slightly lower.
23
For a more complete description of the results of the survey, and some econometric analysis, see
Ceccarelli-Rinaldi (2010), mimeo.
24
Many works conducted in the framework of the OECD Working Party on Private Pensions, as well as of
IOPS (International Organization of Pension Supervisors) underline the complementarities of different
policy instruments in the pension field.
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(21 2011 01 1 P) ISBN 978-92-64-10790-8 – No. 59691 2011
Improving Financial Education Efficiency
OECD-BANK OF ITALY SYMPOSIUM ON FINANCIAL LITERACY
Contents
Executive summary
Part I. Monitoring financial literacy and evaluating financial education programmes
Chapter 1. A framework for developing international financial literacy surveys
Chapter 2. A framework for evaluating financial education programmes
Part II. Behavioural economics and financial education
Chapter 3. Can behavioural economics be used to make financial education more effective?
Chapter 4. Can economic psychology and behavioural economics help improve financial education?
Part III. Importance of financial education in the context of defined contribution pension plans
Chapter 5. Financial literacy and the shift from defined benefit to defined contribution pension plans
Chapter 6. Auto-enrolment in private, supplementary pensions in Italy
Please cite this publication as:
OECD (2011), Improving Financial Education Efficiency: OECD-Bank of Italy Symposium on Financial Literacy,
OECD Publishing.
http://dx.doi.org/10.1787/10.1787/9789264108219-en
This work is published on the OECD iLibrary, which gathers all OECD books, periodicals and statistical databases.
Visit www.oecd-ilibrary.org, and do not hesitate to contact us for more information.
ISBN 978-92-64-10790-8
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