Tuesday, November 23, 2010

Post mega conference

The first conference of the Financial Literacy Research Consortium was held last Thursday and Friday, November 18 and 19, in Washington, DC. The Financial Literacy Center was in charge of organizing it, and I just want to say how happy I am about the outcome. There are as many as five things I want to highlight about the conference.

David Rust, the Deputy Commissioner for the Office of Retirement and Disability Policy at the Social Security Administration (SSA), opened the conference. As he described the work that SSA is doing to promote financial literacy, the image of a family doctor came to my mind. In the same way that a family doctor attends to his patients over time, caring for them at each stage of the life cycle, treating illness when necessary and preserving health when possible, so Social Security has been taking care of individuals, supporting them when they face problems such as disability. And with the financial literacy initiative, SSA is aiming to preserve and promote future financial stability by making sure that people are accumulating enough for retirement and are well equipped to make savvy financial decisions. SSA is ideally situated to promote financial literacy: it is an institution that is focused on the long term and that has the patience to wait for results in the long run. And investments in financial literacy will bear fruit in the long term, in line with the horizon of SSA.

Michael Barr, the Assistant Secretary for Financial Institutions at the U.S. Department of Treasury, delivered the keynote address at lunch. Michael is also a top law scholar and a faculty member at the University of Michigan Law School. He gave one of the most articulate descriptions of the role of financial literacy and financial regulation that I have heard. He generously interacted with the audience after his talk, and the many questions that were asked are a testament to the importance of the work he is doing. The Treasury Department is playing a significant leadership role in the field of financial literacy, and I am proud that Michael Barr is at the helm of many initiatives, including the important work of building the new Consumer Financial Protection Bureau.

Punam Keller, the Charles Henry Jones Professor of Management at the Tuck School of Business, delivered the closing talk. Punam is an expert on marketing strategy and social marketing and she is also the Marketing Director for the Financial Literacy Center. She described why financial literacy needs a marketing strategy and gave many tips on how social marketing can be of help in designing programs that are effective in influencing behavior. Punam is one of the most engaging, energetic, and brilliant speakers I have heard, and I am very happy to have been able to collaborate with her on so many projects.

The conference was large, with over 500 people registered. We designed the conference for interaction, and I believe we succeeded in engaging the audience. There were a lot of questions at the end of each session, and in the sessions I was able to attend, I learned as much from the questions that were asked as from the presentations. The agenda included an hour dedicated to visiting exhibit booths at which our team members displayed the products and projects they have been working on in the past year and interacted with conference attendees. I walked through the conference foyer during breaks and took stock of the many conversations generated by the topics presented at the conference sessions. A number of people approached me to say how much they enjoyed being involved in the conference. A sense of involvement and engagement is not a given at all conferences and one lesson I took away from this event is the value of creating a dialogue between the presenters and attendees. There is much to be gained from a conference at which everyone feels part of the conversation and everyone feels they have a chance for their voice to be heard.

Some of the programs that were presented speak of the creativity and ingenuity that is being used in designing financial literacy programs. One of the most popular presentations and exhibit booths was that of Doorways to Dreams (D2D). D2D has developed a casual video game, called Bite Club, to teach financial literacy. Bite Club, which is inspired by one of the most popular casual games of all time, Diner Dash, offers players a simulated experience in which they face the real-world tension between managing debt payments and current spending needs on the one hand, and saving for the long-term goal of retirement on the other. Players must manage a “day club” for vampires which demands they successfully pay off debt, meet current consumption needs, and save effectively for retirement. The core instructional design teaches the value of three important real world behaviors: (1) saving for retirement, (2) paying down debt, and (3) managing current consumption. In case you did not think there is a relationship between vampires and financial literacy, think again!

Let me turn now to the topic of food. As I have mentioned in previous posts, I believe food contributes to the success of any event. The food at the Ronald Reagan Center was as expected: breakfast was hearty, with plenty of bagels, muffins, juices, and strong coffee (much needed!). For lunch, we had to go for popular choices: salad as the appetizer and chicken as entrée. But the chocolate dessert was delicious, a tart with fresh raspberries on top of a good layer of melted chocolate. I gulped mine down and, since Michael Barr had to rush off at the end of his presentation, I ate part of his, too!

Presentations, keynote speeches, and photos of conference participants will be posted soon on our new web site http://www.financialliteracyfocus.org/

Tuesday, November 2, 2010

Mega conference

I am writing this blog to make sure all my readers are aware of the First Annual Conference of the Financial Literacy Research Consortium. The conference, titled “New Insights and Advances in Financial Literacy: Translation, Dissemination, Change,” will be held on November 18 and 19, 2010, in Washington, D.C., at the Ronald Reagan Building and International Trade Center.

For those of you who do not know it, the Financial Literacy Research Consortium (FLRC) consists of three centers: (1) the Financial Literacy Center, which is a consortium of three institutions under the coordination of the RAND Corporation, (2) the Center for Financial Literacy at Boston College, and (3) the Center for Financial Security at the University of Wisconsin-Madison. The FLRC was established in October 2009 and is supported by the Social Security Administration.

We (the Financial Literacy Center) are hosting this conference and have been very busy preparing for this day-and-a-half event, which will bring together scholars from the Consortium to present their research and discuss how programs, educational products, and policies can best promote financial planning and financial security.

The conference is designed for interaction. For example, it include a series of workshops on innovative products, small seminars that focus on different stages of the life cycle, and a product fair at which participants can try out new educational products and interact with the developers. We are expecting as many as 400 attendees and the agenda features topics that span from video games that teach the perils of debt to building an effective web site for financial literacy to discussions of effective financial education programs. You can find the program and the link to the conference registration at http://www.rand.org/events/2010/11/18/.

A short description of the projects that our center has done in our first year and that will be presented at the conference is posted at http://www.rand.org/labor/centers/financial-literacy/projects/ .

I was attending the Pension Research Council’s Board meeting two weeks ago at the Wharton School, and one of the Board members asked Olivia and me: “So, what are the dates of your mega conference?” I was caught by surprise, but “mega conference” is a pretty good description of our upcoming event, and that’s how we’ve been referring to it ever since!

You are invited to attend the conference, or better, the mega conference! We hope to see you there.

Monday, October 11, 2010

Asset building or debt management?

At the risk of making my blog look dangerously like a travel diary, I write this having returned from Oxford University where I spoke about financial capability at a conference composed of academics, the insurance industry (mostly Allianz), and policy makers. Oxford has a magnificent campus, and I could devote many paragraphs describing the beautiful Corpus Christi college, where the conference was held, but I will instead write about financial capability.

As you may know from previous posts, FINRA Investor Education Foundation supported the National Financial Capability Study, a project done in collaboration with the U.S. Treasury. The National Financial Capability Study consists of three linked surveys: (1) the National Survey, a nationally projectable telephone survey of 1,488 American adults; (2) the State-by-State Survey, a state-by-state online survey of approximately 25,000 American adults (roughly 500 per state, plus the District of Columbia; and (3) the Military Survey, an online survey of 800 military service members and spouses. At my visit to Oxford, I presented the data from the National Survey, administered to respondents between May and July 2009.

The National Survey shows that financial capability is low in the United States, and this lack of financial capability has important implications not only for policy but for the economic system in general. As I discussed at the conference, when people talk about financial security, they tend to focus on asset building. With the shift that occurred in the past twenty years from Defined Benefit (DB) to Defined Contribution (DC) pension plans, individuals have been put in charge of deciding how much to save for retirement and how to allocate their pension wealth. They have to make those choices in the face of financial markets and financial products that are increasingly more complex. As documented in the National Survey, people do not seem well equipped to make the necessary financial decisions. Only 30% of Americans can correctly answer three basic questions related to calculating interest payments and to inflation or risk diversification, concepts that are at the basis of most financial decisions. Several studies have argued that many workers are poorly managing their retirement accounts and pensions funds. We had a glimpse of this with the failure of Enron, which revealed that many Enron employees were heavily invested in company stock; not an ideal way to diversify risk. But DC pensions have not matured yet, and it will be another twenty years before we see how individuals have fared in mostly independent management of retirement savings and investments. Current pensions are mostly paid out by DB schemes, and even the baby boomers who are starting to retire will rely mostly on savings that were part of a DB plan or a mix of DB and DC plans.

If we want to talk about financial security and witness the impact of lack of financial literacy on financial behavior, we have to turn to debt. One other important recent change in the economy has been an increase in opportunities to borrow. Consumer credit, like DC pensions, was rare in the past but has now become available to a large share of individuals, and decisions about how much to borrow have shifted onto individuals. Consider credit cards. Credit card offers arrive in the mail and one can borrow a large amount of money by simply using more and more cards. No one is checking to see whether individuals are borrowing an amount that they can realistically repay. With sub-prime mortgages, almost anyone who wanted a mortgage could get one; banks were not checking to see whether borrowers could afford the loan contract they were getting into. I have used before the analogy of a water faucet: with plentiful and readily available credit, the faucet was fully open and one could draw as much water as was desired; it was up to the consumer alone to decide when to turn off the tap.

What are the consequences of these changes to the economy, and how well are consumers doing on debt behavior? Unlike poor asset building and asset management, the consequences of poor debt behavior can be seen in the short run. Personal bankruptcy rates have skyrocketed, tripling in a matter of ten years. Most sub-prime mortgages went bust, sinking both the banks and the consumers who engaged in them. I hardly think I have to tell you the statistics that have resulted from the National Survey (although being an academic, I will, so bear with me), because American’s problems with debt have been so widely apparent in the last few years. But the findings from the National Survey clearly document just how widespread debt is in the U.S. population. For example, 23% of Americans have engaged in high-cost methods of borrowing in the past five years (payday loans, pawn shops, and the like). In other words, more than one in five Americans has borrowed at interest rates that can be as high as 1000%. Fewer than half of those who have credit cards pay their bill in full each month, and a sizable share of those who borrow on credit cards engage in behavior that generates not only interest payments but also fees. One disturbing result is that many of those who use credit cards in ways that generate interest payments and fees are close to retirement—the people who should be at the peak of their wealth accumulation are instead borrowing at rates that are much higher than those earned on their assets. Another equally disturbing feature is that many of those who carry credit card balances do not know the interest they are paying on their balance. Similarly, many mortgage borrowers do not know some crucial terms of their mortgages. And while about half of the population have retirement accounts, many have been borrowing on those accounts, in effect borrowing on themselves.

These finding bring me to three thoughts. First, it is very limiting to assess financial security by looking at asset building only. One of the ways to help people achieve financial security may be to help them manage their debt. In any case, one cannot look at one side of a household balance sheet (assets), without focusing on the liability (debt) side. Second, we have clearly seen how poorly individuals manage debt when they are put in charge of it without any consideration of what they know and how they make financial decisions. Third, there may be another crisis brewing around DC pensions. In twenty years, when workers with DC-only pensions start retiring and are confronted with the decision of whether to take their pension payments (however small or large) in a lump sum or to annuitize, we will fully understand the consequences of the shift in pension plans. We can act now and prevent a potential crisis by empowering workers with both financial knowledge and help.

Walking through the beautiful gardens of Corpus Christi and the New College in Oxford it was difficult to think of financial crises and their devastating consequences. But mistakes can build up silently and explode without much warning. We all need to be better prepared to live in today’s world of individual financial responsibility.

Monday, October 4, 2010

Advice to Parents

Having offered advice to students in a recent blog post, I want to turn now to parents to talk about how they can be advocates for their children’s financial education. As I have mentioned in previous posts, financial literacy is a necessary skill in the modern world, akin to the skills of reading and writing. Just as, with modernization, written literacy became a critical skill, the realities of today’s economies have made financial literacy a critical skill.

What changes have made this a reality? Today’s young people are very aware of and widely exposed to money, and there are many transactions that require an understanding of basic financial concepts, from deciding what to do with allowance or gift money to managing a mobile phone account to allocating earnings from an after-school or a summer job. As they finish high school, young people confront one of their most important financial decisions: whether and how much to invest in education. The wage difference between college- and non-college-educated workers has been increasing, with individuals without a college degree seeing their wages stagnate or even decrease. Lack of a college degree may mean a lifetime of low wages. On the other hand, the cost of education has been increasing rapidly, requiring astute decisions about which college to attend, in which state, and at what cost.

And when they enter the world of work and young adulthood, today’s young people will have to make many other important financial decisions. With the shift in retirement-planning responsibility from employers and government to individual workers, young people will be in charge of deciding not only how much to save but also how to allocate their retirement wealth, and they will have to do so confronting financial markets that are increasingly complex in terms of products offered and management and understanding of those products. Not only asset building but also debt and debt management will be increasingly important. Opportunities to borrow have expanded and, in addition to financing education, young people will have to learn how to manage credit cards and other, often more expensive, methods of borrowing. In such an environment, mistakes are easy to make and, as the financial crisis has indicated, can be very expensive, and costly mistakes may ultimately mean that you—the parent—are supporting your child far beyond the time you had expected to (I know, a scary thought).

There are several reasons why financial education should be offered in school. First, the level of financial literacy is very low; in my view, too low for young adults to be able to make savvy decisions. Moreover, current studies show that financial literacy is unequally distributed in the young population. According to studies from the Jump$tart Coalition for Personal Financial Literacy, only about 9 percent of high school students can be deemed financially literate. And this small proportion of students is disproportionately comprised of white males who have financially sophisticated parents. Thus, students are going to start out on very unequal footing, and differences can only grow larger over time. And even for those belonging to the more financially literate group, it is not clear that reliance on parental know-how and guidance is an effective way of learning; parents’ experience may not apply in a rapidly changing economic environment, in particular one in which young people will be competing in global financial markets filled with people from other nations, who have been exposed to formal financial education in school.

So, what can be done to promote financial education in school? One good start is to request that your child’s high school participate in the Financial Capability Challenge. The Challenge is a voluntary online exam and classroom toolkit that helps educators teach high school students about saving, budgeting, investing, use of credit, and other important skills critical to developing strong financial knowledge and capability. The next online exam will take place between March 7 and April 8, 2011. Educators and students who score in the top 20 percent nationally and who are among the top scorers in their school will receive official award certificates.

The Financial Capability Challenge is an excellent initiative, and it provides a good incentive to both students and teachers for gaining financial education. More than 76,000 students and 2,500 educators in all 50 states participated in the 2009–2010 school year Challenge. I participated in one of the award ceremonies last spring and saw what a rewarding experience it was for the students, teachers, and parents, and I was proud to be able to be part of it.

Become an ambassador for financial literacy by asking your school to participate in this program. Make sure your children will be prepared for the new world they will be facing: for the decisions they’ll need to make about their own education and for the financial markets they’ll have to participate in if they are to provide themselves with a financially sound adulthood.

Educators can begin registering for the Challenge today at http://www.challenge.treas.gov/.

Help spread the word!

Thursday, September 16, 2010

Advice to freshmen

As I walk through college campuses this fall, I can easily spot the freshmen. They are identifiable not so much by age (although they look younger every year) but by the look on their faces: that unique mixture of surprise, excitement, and fear that accompanies the start of the first year of college. There is so much to do and to learn and there’s no shortage of advice being directed at college freshmen, but I am going to add my piece anyway, and it is not only a suggestion about what students should do but who most needs to do it.

My recommendation is simple: if your school offers a financial education course, take it. If it does not, take a basic economics course (Economics 101 or Principles of Economics). Financial knowledge has become an essential life skill; just as it is necessary to be able to read and write (and use Twitter and Facebook), it is essential to have basic financial knowledge. Financial decisions are made every day, from how much to borrow on a credit card to how to manage a checking account to whether to pay for dinner on a disappointing date. And the responsibility of making good decisions has been shifted onto individuals. Both government and employers are increasingly asking citizens and workers to take care of their own financial security. Like it or not, the benefits and risks associated with financial decisions are now yours. And you have just embarked on one of the biggest investments of your life: the investment in education (in case you are not aware of just how big an investment it is, ask your parents, but only after they recover from the shock of paying the first round of bills for tuition, room, and board). In my view, education is one of your best investments, with returns in higher lifetime wages and likely entry into more stable sectors of the job market. (There tends to be lower unemployment among jobs requiring a college education.) And there are many intangibles, too, that command a value, from gaining a network of smart and educated friends to having the opportunity to experiment and gain knowledge in many fields, under the guidance of experts.

In the same way that low educational attainment may mean a lifetime of low and erratic wages, so low financial knowledge has been found to be associated with poor financial decisions, from excessive borrowing to lack of participation in financial markets to inadequate wealth accumulation for retirement. The costs of poor decisions can be high, particularly when dealing with debt: choosing the wrong mortgage can push people into poverty or bankruptcy, and according to the research I did with Peter Tufano from Harvard Business School, those who display low levels of financial literacy are likely to pay 50% more in credit card interest and fees than those with higher levels of financial literacy.

While a course in financial literacy or in basic economics can benefit all students, based on my years of research, I recommend it most strongly to the following students:

Women: According to my research, women are much less financially literate than men. I do not know why this is the case, but one worrisome finding is that there is a gap in financial knowledge between women and men not only among young people but also later in life. This likely means that women face fewer opportunities to become financially knowledgeable than men do, for example by interacting with groups (perhaps other women) who are less likely to talk about finance. Enrolling in a college-level economics or financial literacy offers a chance to counteract that tendency.

African Americans and Hispanics: There is a wide gap in financial knowledge between whites and African-Americans and Hispanics, even after accounting for the many demographic differences in these groups, including income and wealth. Again, this may be the result of fewer learning opportunities over the lifetime. A college course in economics or finance can start to make up for this gap.

Students whose parents are not financially sophisticated: According to my research, as well as research from the Jump$tart Coalition for Personal Financial Literacy, the (small) percentage of students who are financially knowledgeable are disproportionately white males with college-educated parents (in particular, college educated mothers) who had stocks and retirement savings when their children were teenagers. This means that a lot of financial knowledge is learned at home. If you are among the first generation in your family to go to college and your parents have never invested in stocks, you start at a disadvantage in terms of financial knowledge with respect to your peers. Take the opportunity now to make up for that gap.

Students who hate economics and finance: If you think that the study of economics and finance is for uncreative people, and is evil and will only teach you to work on Wall Street and exploit poor people and poor countries, then you, too, should sign up for a basic economics or financial literacy course. In my experience, people who express disdain for economics tend to make poor and costly financial decisions. Take advantage of a chance to offset that tendency.

Let me finish by adding that there is a risk in taking a course on financial literacy and economics: You may actually find that you like it!

Thursday, September 9, 2010

Comparing financial literacy of young people across countries

One of the new tasks I have taken on is to chair the Financial Literacy Experts Group at the OECD, which has been put in charge of designing a module on financial literacy for the Programme for International Student Assessment (PISA). The Programme is a worldwide evaluation of 15-year-old students’ scholastic performance, evaluated first in 2000 and repeated every three years. A new module will be proposed for the 2012 survey to measure financial literacy among 15-year-olds in 19 countries (the countries which so far have agreed to participate are Albania, Australia, Belgium, Brazil, China, Colombia, Croatia, Czech Republic, Estonia, France, Hungary, Israel, Italy, Latvia, New Zealand, Slovack Republic, Slovenia, Spain, and the United States).

This is an important initiative that shows the leadership role that the OECD has undertaken in the field of financial literacy at the international level and that will provide much needed data to improve educational policies across countries. There is a lot to be learned from these data. First, we will be able to assess the level of financial knowledge of young students, before they take on related decisions such as choosing whether to pursue a college education, in my view one of the most important decisions in a person’s lifetime. Second, we will be able to assess which students know the most and which know the least, not only across economic strata and demographic groups but also across countries. Third, we will be able to assess the link between financial literacy and mathematical ability as well as the link between financial knowledge and knowledge in other fields, such as the sciences.

The comparison across countries is particularly valuable. Not only are financial markets becoming increasingly integrated but many countries are shifting to pension systems that require increased individual responsibility. Moreover, the availability of consumer credit and the instruments associated with that credit (credit cards, short-term loans, payday loans, and so on) require that consumers have the ability to understand the terms of the contracts and their consequences. Countries in which consumer credit has expanded rapidly have also witnessed an increase in personal bankruptcy. How do countries handle the increase in individual responsibility, how much are young people prepared for the new financial systems which are becoming more global and more complex, and who are the leaders in terms of financial literacy? These are very important questions and the objective of the data is to provide countries with evidence that can guide policies toward improving financial education.

PISA data has been used in many policy assessments. Just last Sunday the New York Times had an article about the strength of Brazil’s economic expansion. While Brazil has been growing fast, the low level of education of the population (as measured by the math scores in PISA studies) is seen as a potential stumbling block both in terms of ability to produce a qualified labor force and to promote innovation. And interestingly, it is the Nordic countries (Norway, Finland, Sweden) whose students do very well in terms of mathematical ability, and perhaps it is not by accident that these countries host some of the most innovative firms, products, and ideas—Nokia, Ikea, Santa Klaus (if you believe, as I firmly do, that he lives in the North Pole).

This is clearly no small task and the Financial Literacy Experts Group is hard at work to design questions that are comparable across countries. We have representatives who come from different countries and who also bring a variety of experiences. We have not only educators but also representatives from government institutions (Treasury and Finance departments), central banks, and retirement commissions. Moreover, we have representatives from countries in which financial education in high school has been or is in the process of being implemented and countries in which financial education in school has yet to be adopted. This will allow us to examine whether the countries whose young people are exposed to financial education programs in school do better than countries in which young people learn on their own.

One other thing I’ve learned is that among Italians, one has to be careful in discussing PISA. I had hastily mentioned my new role to my father during our weekly calls, telling him that one of the benefits of the project would be a lot of travel close to my family’s home in Italy. I realized the discussion had gone astray when my sister sent me an e-mail congratulating me for joining the expert group on the Leaning Tower of Pisa and asking what, exactly, I had to do in there. We had a good laugh; this added new meaning to my father’s conviction that his daughters can do anything!

Thursday, August 12, 2010


I was informed recently that my blog has been listed as one of the must-read blogs in the field of economics. While I don’t know much about how this ranking was done, it did boost my ego quite a bit and I thought I would post the link:


When I started blogging some time ago, I did not know how much I would enjoy it. While my schedule has become quite busy, particularly since taking on the role of director of the Financial Literacy Center, I am trying to keep up and write as much and as often as I can. Both the financial crisis and the financial reforms have offered a lot of material to reflect upon and to write about, so I am not short on topics, even though I write exclusively on subjects related to financial literacy.

But I am posting this short blog to thank my readers for their support and also to encourage them to continue reading. Have a good rest of the summer to all. I am getting ready to go to Italy, one of my favorite vacation places, and I will write more from there.

Monday, August 9, 2010

Financial education: What works?

I am just back from Denver, where I attended a conference titled “Implications of a Quarter Century of Research in Personal Finance,” organized by the National Endowment for Financial Education and Tahira Hira from Iowa State University. A group of researchers met over three days to discuss what we have learned so far on this important topic. I headed a team that addressed the question, “What learning strategies, interventions, and delivery methods hold the most promise for effective financial education outcomes?”

As we reviewed the many papers that have been written on this topic, we faced the difficulties commonly encountered when looking at the existing work. Navigating the bulk of existing literature and figuring out the common findings is a challenge, but our analysis of that extensive literature led us to what we called a “cautious optimism” about the effects of financial education. Along with this optimism, we are mindful of several difficulties inherent in evaluating financial education interventions. First is the issue of self-selection: i.e., are the people who attend financial education programs those with an existing interest in the subject, and is it their interest or the content of a program that motivates them to make certain financial decisions? Second is the dearth of details regarding program content, frequency, delivery method, and goals (to improve knowledge or change behavior or to satisfy a legal requirement) of the programs that are reviewed in the literature. This lack of information makes it hard to evaluate what makes a program effective (or ineffective). Third, one has to be mindful of the size of the intervention. Small interventions, for example, providing information on a particular issue cannot transform naïve investors into Warren Buffetts.

The team identified places where financial education seems most effective and methods to make financial education more effective. The most effective place for financial education was concluded to be the workplace; important methodology was judged to be that relating to adult education and to informal learning.

There are many (some obvious) reasons why the workplace is an ideal venue in which to provide financial education. First, this is where many adults are and also where many important financial decisions are made, e.g., how much to contribute to a retirement account, how to invest retirement wealth, whether to annuitize retirement wealth, and the list goes on. There are also benefits to employers in making sure that workers save for retirement and avoid financial problems, as financial problems and/or worries can affect worker productivity and morale. One benefit to both employers and employees, which in my view is not discussed enough, is that financial education can make people aware of and able to take advantages of benefits an employer offers (for example, employer matches of retirement contributions) or better understand and take advantage of tax-favored assets.

Financial education has normally been conceived of as being delivered in a classroom, but one has to think more broadly and creatively about adult education. In contrast to young students, adults have a rich set of experiences that shape how they view their financial situation. Additionally, financial education can be made more effective with reference to theories of learning that offer important suggestions and insights. One such theory is Mezirow’s transformative learning theory. This theory has been around for over 30 years and has been used as a framework to help make sense of learning and teaching in numerous disciplines—health and medical education, intercultural relations, psychology, environmental sciences, higher education, instructional technology, archaeology, human resource development, just to mention a few. I mention the importance of theory here because, in my view, one of the reasons why financial education has not been as effective as it could be or has not been given the attention it deserves is because it is not considered within a rigorous and theoretical framework.

Even within such a framework, it is possible to incorporate different ways of learning, including informal learning. Informal learning is increasingly becoming recognized as significant to workplace education. Instead of having employees participate in traditional workshops or training sessions, employers are creating conditions in which workers can learn from each others. Financial educators, policy makers, and program planners will do well to recognize that financial education efforts can be successful outside of the formal settings that are the traditional venue for financial education.

As I have mentioned in previous blogs, to run a successful conference you need to have good people, good papers, and good food. Having provided, I hope, a little glimpse of the energetic discussion that went on throughout the meetings in Denver (as well as the informal learning that occurred outside of the meeting rooms!), let me turn to the topic of food. Our meals were a blend of French and Italian cuisine. We went to a wonderful French bistro one night where we tried pâté, saucissons, onion soup, and a wonderful pistachio-crusted trout. The Brown Palace hotel, where we stayed, provided us with succulent breakfasts. At a lunch one day we had gourmet pizza. Some were surprised by this lunch choice. Not me. Give me pizza, and I am happy!

Monday, July 19, 2010

Some comments about "Greater Foools"

I am happy to post on my blog a comment by Nan Morrison, President and CEO of the Council for Economic Education, on the article "Greater Fools" published in the New Yorker.

James Surowieki’s financial page piece “Greater Fools” unfortunately quite accurately diagnoses the depths of America’s struggle with financial literacy and its costs to society. And without significant changes, our children may face an even worse fate than their parents. Nellie Mae reports that on average, incoming freshmen now bring an average of $1,585 in credit card debt to college.
Yet despite the extent of this problem, according to a CEE / State Farm survey, only 21 states require an economics course to be taken in K-12, and only 13 states require a course in personal finance. Even fewer require testing of these concepts. But requirements need trained teachers, and to make matters worse, as a society, we are not preparing teachers to deliver this vital content with confidence. In a recent survey by the National Endowment for Financial Education (NEFE), less than 20 percent of teachers reported feeling competent to teach basic personal finance topics. Furthermore, even many teachers of high school economics have taken two or fewer semesters of economics in college.

In our eyes, the real question is “How, as a society, can we improve our economic and financial literacy and what benefits might we see in future generations as a result?” Our answer at the Council for Economic Education (CEE) – equip and enable teachers to educate our children in basic personal finance and economic concepts in school from kindergarten through 12th grade. Why? Good habits are built early, just like brushing your teeth.

America is about economic opportunity – our kids need to be financially fit and economically literate to grasp that opportunity. As consumers, investors, entrepreneurs, and voters we all make decisions that involve finance and economics every day. If every parent, school and state, made economic and financial education a priority in schools from K-12, perhaps more Americans would be able to ensure their financial well being in a changing and complex world. Improving our collective economic and financial literacy is vital to our economic growth, job creation, and prosperity. Many in government, education, and financial services, across our nation support those goals, as they are good business and good citizenship well as essential ingredients in a stable financial system.

Nan J. Morrison
President & CEO, Council for Economic Education

Friday, July 16, 2010

Greater Fools

James Surowiecki’s recent column in The New Yorker magazine discussed the dangers of financial illiteracy in America. It is great that such a prominent and widely read magazine has featured a piece on the issue of financial illiteracy. I do not know about you, but I love The New Yorker: not only is it great reading, but it makes me dream of all the things I could do if I were living in New York! In this blog, I want to write in more detail about something that I discussed with James Surowiecki and which he reported in his column.

Of the changes that we have witnessed in the financial markets in recent decades, we have seen not only an increased complexity in financial products but also an increased reliance on the expertise (or lack thereof) of consumers. For example, individuals have been bombarded with credit card offers. One could easily sign up for a sizeable collection of credit cards and, in so doing, borrow a large amount of money. While some consumers have been targeted more than others, many are receiving printed checks in the mail. These types of offers make it very easy to borrow; and it is the individual who has to be savvy about how to use the credit cards and checks that come in the mail; the offers will keep coming, and the amount one can borrow will keep increasing, irrespective of how much one can afford.

Subprime mortgages have worked in much the same way. While banks and mortgage lenders would normally do background work in order to assess how much to lend their potential borrowers, subprime mortgages were available to almost anyone who wanted a mortgage, regardless of their ability to afford the loan they were taking on and without much or any look to proper documentation. For some, the offer came in the mail together with the credit card offer!

In other words, we have opened the doors and made credit available to a much larger number of individuals than was the case several decades ago. Moreover, while not infinite, the amount people can borrow is very large. And perhaps most importantly, it is often up to the consumers to decide what and when it is enough.

This is why financial literacy is so important and why, in my view, developments in financial markets should be accompanied with initiatives to provide the knowledge required to make good use of any such developments. One cannot trumpet how great it is to be able to buy a house at age 25 if young workers do not even know what interest compounding means. Similarly, dispensing credit cards to people who have little understanding of how fees work can be counterproductive at best and catastrophic at worst.

I have a similar view toward assets. Some have been lamenting the high proportion of unbanked individuals, in particular among certain segments of the population. I believe financial access is incredibly important, but we cannot simply give everyone a checking account and think we have improved people’s lives! Not knowing how to use a checking account to prevent overdraft fees and returned checks can quickly turn the benefits of this simple asset into a nightmare.

As we pass new legislation about financial reforms, we should keep in mind the many advantages that advanced financial markets can bring to the economy but also be mindful that without financial knowledge, people now have a much greater opportunity not only to increase wealth, but also to destroy it. As I have argued in many previous blogs, it is not enough to regulate supply, we also have to think about demand and how to empower consumers with the knowledge necessary to make proper financial decisions. We should not be talking only about banks, we should also be talking about the borrowers!

On a side note, James Surowiecki’s column was published on July 5, which also happens to be my birthday. Without knowing it, Surowiecki provided me with a very nice birthday gift by writing so proficiently about a topic I care so much about. Only a trip to New York would have made it better!

Read James Surowiecki’s column here: http://www.newyorker.com/talk/financial/2010/07/05/100705ta_talk_surowiecki

Wednesday, July 7, 2010

Financial Literacy Among the Young

I want to write this time about financial literacy among young people. Olivia Mitchell, from the Wharton School; Vilsa Curto, from the Education Innovation Laboratory at Harvard; and I have just published a paper in the Journal of Consumer Affairs that describes the results from the responses to three questions that we added to the National Longitudinal Survey of Youth in 2007-2008. Respondents to this survey are 23-28 years old.

These young consumers must confront complicated financial decisions in today’s demanding financial environment, and financial mistakes made early in life can be costly. Young people often find themselves carrying large amounts of student loan or credit card debt, and such early entanglements can hinder their ability to accumulate wealth or to choose their desired job. To examine how well equipped young people are to make financial decisions, we assessed knowledge of basic concepts: the ability to do a 2% calculation and the understanding of how inflation and risk diversification work.

We have three major findings:

1. Financial literacy is low among young adults. Only 27% of people age 23-28 can answer three basic questions about interest rates, inflation, and risk diversification.
2. There are large gender differences in financial literacy. Young women know much less than do young men about basic financial concepts. In another survey, we found large gender gaps in financial literacy among older respondents (51 and older), and this recent work tells us that these differences hold when we look at young people.
3. Financial literacy is influenced by parents. Those who are financially literate are more likely to have college-educated parents (in particular, college-educated mothers) and to have parents who had stocks and retirement savings when these young adults were growing up (when they were 12 to 17 years old).

I want to stress the third finding: family background is found to have a strong impact on financial literacy. A college-educated male whose parents had stocks and retirement savings when he was a teenager was about 45 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents did not own retirement or risky assets. In other words, financial knowledge appears to be much higher for those who grow up with parents who are financially sophisticated.

This research is consistent with the findings from the Financial Capability Survey, the results of which were released last December by Secretary Geithner together with Secretary Duncan. http://www.ustreas.gov/press/releases/tg446.htm. That survey also documents very low levels of financial knowledge, particularly among the young.

These are unpleasant findings. We have put people in charge of many important financial decisions. People must decide how much to save for retirement and how to invest that savings, yet people do not appear to understand how to diversify risk; individuals are bombarded with credit card offers, yet we are learning that many people do not know how compound interest works, so cannot calculate how their debt will grow. Research has shown that financial illiteracy can be linked to problems with debt, lack of participation in the stock market, lack of retirement planning, and lower wealth accumulation. If we do not address financial illiteracy among young people and if we do not equip young people with the tools they need to make sound financial decisions, we may pay the cost down the road.

I am worried about the implications of these findings. If financial literacy is learned at home, many young people will begin their lives at a disadvantage, as not everybody comes from a college educated family or from a family that has stocks and retirement savings. In other words, inequality may start at the very beginning of the economic life if we do not offer everybody an opportunity to learn financial literacy outside of their homes. This is one reason why it is important that our schools incorporate financial literacy into their curricula.

In my work as a college professor, I am surrounded by young people. Last month, as we bid farewell to the Dartmouth class of 2010, I could not help but wonder whether we have provided all that is needed for these students to start on their journey into adulthood. Most of them will start a job, open a new bank account, rent an apartment, get more credit cards, pay down their student loans, donate to their college (ahem . . .), and pay taxes. Are they ready?

Thursday, July 1, 2010

Proposals, Pizza Boxes, and Prilosec

I have not written for a while, but now—after a month and a half of grueling work—am able to turn attention to my blog, having just finalized the submission of a multi-project proposal for the second year of funding for the Financial Literacy Center.

Every year at around this time, we have to collect our best projects and ideas and submit them to our funder, Social Security. There are many valuable aspects of this process. First, it forces us to think hard about the many ongoing projects and the new ideas we have been compiling with input from our teams and then evaluate the most promising ones to submit for funding. It makes us think about the future and about the type of work we’d like to engage in over the next year.

Second, it forces us to be specific about what we want to pursue. This is the time when we need to transform ideas, conjectures, even dreams, into concrete plans that have to be described in detail, thinking not just about the outcomes we want but the manner in which we plan to achieve them.

Third, it gives us the opportunity to form new partnerships. Several of our proposed projects have become multi-disciplinary, with psychologists, linguists, and law scholars collaborating with economists. And co-authors from existing projects are brought in to add their experience and insight to newly proposed projects.

But for those of you who have never dealt or submitted a grant, let me tell you that despite all of the good that comes of it, the process is grueling and the work is massive. There are strict procedures to be followed, a vast amount of documentation to be provided, deadlines to be met, and, if more than one team is involved, a lot of people to coordinate. On a scale from 1 to 10 of the unpleasant things one might do, this is probably an 8, right up there with a root canal or training for the Tour de France after major surgery.

As the submission deadline approached last week, I looked dangerously like my students on the day of a final exam: my hair uncombed, coffee cups and empty pizza boxes piling up on my desk, mail unopened, and email clogging up my inbox. Staying late at my desk, I startled more than one security guard patrolling the building to shut off the lights late at night. And, of course, the sure indicator of a grueling grant submittal period: regular doses of Prilosec after week two of the process.

Truth be told, I have gotten much better at writing grants. My first grant submissions, which I wrote with no understanding that I was competing with the giants in my field, I have to say were not received with great enthusiasm. In some cases, my submission did not even merit consideration among the proposals to be funded; in others I received rejections complemented by letters from referees who had a lot of not very friendly things to say about my research ideas. The ones I have the fondest memories of are those in which I was told I was not quite there, and was invited to re-submit. I did that, adding another two or three weeks of work (and medication), and—bingo!—I was rejected after the resubmission!

Grants have became a part of my academic life, as I need support for big projects—to hire assistants, to pay for data, and to do empirical research. Not many institutions had the stomach to fund research on financial literacy when I started working on it many years ago, and I am very happy that Social Security has been a funder and a supporter of my work from the very beginning. I will probably be collecting Social Security benefits by the time I publish this work, so I can say that Social Security has been and will be a constant in my life.

But now the submission is over; I can go back to a healthy diet and to a normal intake of coffee. I will again think positively about the future. And I am very busy catching up on sleep.

Friday, May 28, 2010

Improving Our Financial IQs: Why Managing Money Should Be a Lifetime Skill

At the Wharton conference that I described in my previous blog, I sat down with Michelle Greene for an interview with Knowledge@Wharton. The link to the interview is provided below, but in this blog I wanted to discuss a few topics that have come up many times in this and other discussions.

In case you do not know Michelle, she is the Deputy Assistant Secretary for Financial Education and Financial Access at the U.S. Treasury Department. The title may look long, and it is for a good reason: she heads the office at Treasury which is in charge of financial literacy and financial education. One of the issues that office has to deal with is that many Americans are unbanked or underbanked and do not participate in traditional financial markets, hence the attention to financial access in addition to financial literacy.

Many people have asked me why financial literacy is so low and why we appear to be getting worse in terms of financial knowledge. In my view, it is not the case that financial knowledge has worsened, rather that the world has changed. Individuals have been put in charge of decisions that were—in the past—the responsibility of employers or the government (such as determining how much to put aside for retirement and how to manage pension wealth). Individuals have to make these decisions while facing much more complex financial markets. For example, ETFs, REITS, and 403(b)s were not in vogue twenty years ago and yet, while the acronyms are not exactly appealing, they have become part of what an average worker has to deal with in their financial planning. In the past, a CFO with an MBA in finance was making decisions about how to allocate investments in order that the company be able to pay a pension to the firms' employees; now workers John and Jane Doe are in charge of making these decisions. This means that every single worker now has to spend time and effort in collecting information and searching for the best conditions.

Given these changes, it may be obvious why the office that Michelle Greene heads is so important: we need to equip people with the tools to make financial decisions and increase financial knowledge if we are asking them to be in charge of their financial well-being after retirement. But, it is not enough to put them in charge. These are difficult decisions—even for a CFO with adequate training—and we cannot expect the average worker to navigate the financial markets if he/she does not know the difference between a bond and a stock or what an annuity is.

As Michelle stated in the interview, if there is a silver lining to the financial crisis, it is that there is a renewed sense among people that they need to understand their own finances. They need to engage in better behaviors and think more about the future. The financial crisis has also taught us the cost of financial mistakes. While we have not yet witnessed what may happen if workers with defined contribution pensions accumulate too little for retirement or make bad decisions on how to draw down the money from their retirement accounts, we have seen that choosing the wrong mortgage can end with the sheriff at the door and the furniture for sale on the lawn.

Michelle also spoke of the importance of starting to learn and to save when young and the need for inserting financial education into our schools. In my view, this is critically important as people need to have a basis on which to build their financial knowledge. Schools cannot teach every concept that will be of importance for making financial decisions in the future. But they can make people appreciate the importance of financial knowledge and the need to build on it over time. I am often asked what we should teach in high school to improve financial knowledge and my short answer is that we should teach people to be curious and to be interested in financial literacy. We do not teach literature expecting students to write the next War and Peace but rather to appreciate a good book. Similarly, we should teach financial literacy so that students appreciate the need to be informed before making financial decisions.

I want to end by saying that I am extremely proud of the work that Michelle is doing. Her work can and is having an impact on the lives of people, on the decisions that John and Jane Doe have to face—decisions that are part of a very different system than the one encountered by previous generations. There is a lot at stake here, and I hope that people will realize that inside the gray and imposing Treasury building alongside the White House, there is an office devoted to improving financial literacy and financial access.

Monday, May 3, 2010

Financial Literacy: Implications for Retirement Security and the Financial Marketplace

Olivia Mitchell and I organized a conference at Wharton last Thursday and Friday, April 29–30, titled “Financial Literacy: Implications for Retirement Security and the Financial Marketplace.” This seems a good way to end Financial Literacy Month and reflect on the importance and role of financial literacy.

There are 3 ingredients to a successful conference: (1) good people, (2) good papers, and (3) good food. We provided a good lunch and we had dinner, surrounded by Chinese art, in a large hall in the University of Pennsylvania museum. But the people and papers were more than good, and I left Philadelphia with a lot of ideas and projects I want to pursue.

Our keynote speaker, who opened the conference, was Michelle Greene, the Deputy Assistant Secretary for Financial Education and Financial Access at the U.S. Treasury. She told the audience about the initiatives and the approach of the office she heads at the U.S. Treasury. Several things resonated with me. She stressed the importance of evidence-based policies and cited several studies, from the FINRA Financial Capability Survey to the FDIC Survey of Unbanked and Underbanked Households. She also stressed that the U.S. Treasury wants to put financial education where it works and where it is most needed. In my view, these criteria are not only critically important but also offer a way for research to make a real difference and to impact policy. She discussed the work that the Treasury is doing with state and local governments and with the private and nonprofit sectors. This is a reminder that while we need a national financial literacy policy, a lot of work is done at the local level, thus a grassroots approach when dealing with financial literacy is important. The U.S. Treasury is also coordinating the many federal agencies that are doing financial education programs. I was particularly pleased to know that the White House has joined the Financial Literacy and Education Commission and, in particular, that the White House Council on Women and Girls has become involved in financial literacy. As I have mentioned in many of my blogs, there is a real need to focus attention on women and girls and to address the existing gender gap in financial literacy. Michelle also mentioned that the website www.mymoney.gov has been revamped. This is the website to go to obtain financial information, and, again, I cannot stress enough the importance of having a trusted and independent source of information to rely on.

The papers that were presented at the conference spanned many topics. Some documented individuals’ financial mistakes. While the experience with subprime mortgages has made us acutely aware of the problem of financial errors, evidence about the use of credit cards and payday loans adds reasons to worry about the behavior of households who use high-cost methods of borrowing. Families have also started to borrow from their 401(k) plans, i.e., they are now borrowing from themselves and the money they have put away for retirement. And financial literacy seems to be a contributing factor: those with low levels of financial literacy are found to be more likely to borrow from themselves. Low literacy is also found to keep people from investing in the stock market. While one has to understand and be aware of the risks of investing in stocks, it is problematic to shy away from the stock market, particularly when investing for the long run. Moreover, when selecting a pension fund from a menu of possible offerings, those with low financial literacy are shown to rely more on the advice of employers, friends, and coworkers than on cost fundamentals. Those with low financial literacy are also more sensitive to how information is framed when interpreting the relative benefits of different investment choices. Given the choices that people have to make on their DC (defined contribution) pensions, these are worrisome findings.

Other papers documented other aspects of financial literacy. For example, when surveyed individuals are asked to rank their own financial knowledge, many give themselves high rankings, yet responses to a set of financial literacy quiz questions result in relatively low scores for many individuals. This type of overconfidence can negatively influence financial behavior.

Still other papers looked at the effectiveness of financial education initiatives provided by employers or by counseling agencies. Paraphrasing Michelle Greene’s message, we need these studies and rigorous evaluations of financial education programs to be able to allocate our resources to where they are needed, to where programs are proven to work!

The conference did not focus on the U.S. experience only. The retirement commissioner from New Zealand described some of the successful strategies that have been used to promote financial literacy among Kiwis (I mean the citizens of New Zealand, not those delicious fruits). The OECD has been a pioneer in promoting financial literacy and financial education programs and has worked on this topic since 2003. They have been not only a major force behind many important initiatives but are also working on promoting financial literacy in many emerging nations, from India to China to Latin America. Most importantly, they are serving as the coordinator of the activities that many countries are engaging in and serve as a clearinghouse for data and information. The World Bank has recently joined that effort and is devoting resources and expertise to promoting financial literacy among developing countries; in my view, an important and necessary effort.

In the closing panel, one representative of the Social Security Administration remarked that “he had not heard yet that financial literacy hurts.” I would very much agree that there are no obvious downsides to financial literacy.

We ended the conference with a quote that Michelle Greene had included in her presentation slides. She cited President Obama, who said, “If you work hard your whole life, you ought to have every opportunity to retire with dignity and financial security.” We hope that the government, academics, the financial community, and not-for-profit institutions will all work to make that opportunity possible.

Sunday, April 25, 2010

Fixes for the Financial System

Today's New York Times described the proposal of six academics for changing the financial system. Mine is one of them.


Compound Interest 101

A person borrows $100 at an annual interest rate of 20 percent. How long does it take that debt to double? About four years. What share of American adults can figure that out? About one in three, says Annamaria Lusardi, an economist at Dartmouth College.

Ms. Lusardi wants to add financial literacy to high school curriculums. A crisis sparked in part by the decisions of millions of Americans to take mortgage loans they could not afford has underscored her conviction that “lack of financial knowledge is alarmingly widespread.”

Only three states — Missouri, Tennessee and Utah — now require a course devoted to personal finance, according to the JumpStart Coalition for Personal Financial Literacy, a nonprofit group. Another 18 states incorporate some lessons into other courses.

“Financial literacy is an essential piece of knowledge that every student should have,” Ms. Lusardi wrote recently on her blog. “Just as reading and writing became skills that enabled people to succeed in modern economies, today it is impossible to succeed without being able to ‘read and write’ financially.”

Let's hope that in this time of reforms some attention will be given to consumers and to financial literacy.

Friday, April 23, 2010

April showers bring future flowers

I like very much the fact that April has been declared Financial Literacy Month. As a result there has been a flurry of events and activities devoted to discussing, promoting, and improving financial literacy. I cannot stress enough how important it is to have financial literacy at the center of attention, including the extensive coverage it’s been receiving in the media.

It is also at this time that one realizes the need for information. How many institutions are doing financial education programs and how do they do them? I do not know the answer to this question nor would I know where to find this information. I also fear that anybody who is entering this field could end up reinventing the wheel: devising yet another set of curricula, materials, and programs rather than making use of what already exists or backing their program with proven best practices.

Via the creation of the Financial Literacy and Education Commission (FLEC) under the coordination of the Office of Financial Education at the U.S. Treasury, the federal government had admirably coordinated the efforts of its agencies and bureaus that are doing financial education programs. But what about the not-for-profits and other organizations that have become engaged in financial literacy?

In my view, there are many advantages to sharing information and in some degree of coordination among agencies, organizations, and businesses. First, it is very important to know what others are doing so as to minimize wasteful overlap. These days everybody seems eager to set up yet another Web page adding to the ten-thousand existing Web pages! While I appreciate the differences that may distinguish these offerings, I am afraid that their proliferation may simply add to the search costs of individuals who have to navigate an ocean of information on the Web. For those developing financial literacy programs, coordination with others who are doing the same thing can save valuable time and resources. For multiple organizations to spend weeks and months in designing programs that others have already thought about and perhaps even implemented and tested is certainly a waste of time and brain power.

Understanding what is effective in improving and promoting financial literacy is another critical piece of information. It would be very valuable to have this information reported somewhere. We need to devote resources to that which is effective and which has an impact. Funders should be able to determine which programs are effective and worthy of support and institutions interested in promoting financial literacy should be able to look for success cases and use them as models for their own programs.

Because I direct a center that is devoted to promoting financial literacy, I have to subject myself and the center’s research teams to these criteria: evaluate what we do, share information, coordinate activities, and not waste a cent of our valuable resources.

Thursday, April 15, 2010

Tax day

Today is April 15: the deadline for filing income taxes. Money is on everyone’s minds these days. Even before the recession, Americans were confronted with an increasingly complex financial landscape that requires difficult financial decisions. Yet, studies show that most are not well-prepared to handle their personal finances. I discussed this topic on Vermont Public Radio last Tuesday, and how we can improve our financial literacy. If you would like to listen to the interview, the link is below:


Thursday, April 1, 2010

April 2010: Financial Literacy Month!

April is Financial Literacy Month. You know financial literacy is in troubles when they dedicate a month to it! Because today is April 1, I thought we could start off with a list of the reasons to be financially literate, following the example of other famous top ten lists.

Top ten reasons to be financially literate:

1. Because being financially literate is smart and sexy!
2. Because it is useful to know that ARM has to do with mortgages and is not a rock band;
3. Because 401(k) is the worse name that could be given to pensions and you still cannot figure out how anyone came up with it;
4. Because you are tired of having to get endless stock market tips from your brother-in-law;
5. Because you would love to criticize banks but do not know what to say;
6. Because you need topics to share with your barber/hair-dresser, taxi drivers, and bar tenders that make you look rich and cool;
7. Because everybody talks about the financial crisis and you have no clues what is going on and whom to blame other than banks;
8. Because you have time to spare now that unemployment is really high and nobody seems to be able to find a job;
9. Because you want to protect granny from scams;
10. Because you want to mathematically prove that the Lexus your neighbor drives with such pride was a bad financial decision.

Friday, March 26, 2010

Regional Feds and Financial Literacy

I recently visited the Federal Bank of Richmond to give a presentation at their Community Development Advisory Council’s spring meeting. Under the leadership of President Jeffrey Lacker, the Community Affairs Office of the Bank is making the promotion of financial literacy one of their strategic goals.

Regional Feds are ideal vehicles for the promotion of financial literacy. They have an intimate knowledge of the local economy and of the problems and most pressing needs in the community. They are in contact not only with local banks but with business owners and employers, community development agencies and not-for-profits. Much of the conversation that took place during my short visit to Richmond—including during coffee breaks and on a shared cab ride to the airport—was about using business principles to help development in the local community. This is ideal grounding for financial literacy; we need to develop and implement effective programs and avoid feel-good initiatives that may go nowhere.

So, I welcomed the hard questions that I was asked during the presentation, the insistent focus on what works and what the evidence shows about the effects of financial literacy. I prepared a lot for this audience because I knew I would be facing researchers who understand the nuances of research work and also economists and businesspeople who are interested in the relevance of the subject to their work.

Regional Feds have active research departments and some of the best research originates from these banks. Not only do these researchers not have teaching commitments (which—believe it or not—take a lot of time!) but they often have access to great data. They are confronted all the time by tough and important questions and this directs them toward research that is of economic and policy relevance. Economists from the Richmond Fed’s research department have written about entrepreneurship and financial education, among other topics. They had produced a review of the effectiveness of financial education that I have used in my research and that I discussed with them at the meeting.

During the lunch discussion in an elegant room in the high floor of the building, we talked about financial literacy in schools. Two main ideas emerged that I want to credit to the economists from the research department.

First, the advancement of learning normally builds over the years: one first learns beginning Spanish, then masters intermediate Spanish, and then can take advanced Spanish courses in the later years of high school. Similarly, one starts by reading short chapter books, then simple essays, short stories, then novels . . . it takes a while to build up to War and Peace. But financial education is often a stand-alone course offered in the final year of high school without much, if any, preparation in previous years. It is hard to imagine, even from a simple pedagogical perspective, that this method could be effective either in teaching financial literacy or in making financial knowledge stick. (In my case, I remember little from my one Spanish course but I could challenge Schwarzenegger to a Hasta la vista, baby! contest.)

The second idea is that one of the objectives of financial literacy education should simply be to make people interested in learning more; laying the groundwork so that people will seek out information and education over the course of their life. In the same way that good English literature instruction makes us appreciate a good book and fosters a taste for reading, so good financial literacy instruction may give people a taste, early in life, for future learning: reading the business section of the newspaper and making an effort to incorporate good financial practices into everyday life.

President Lacker took me around the building that houses the Richmond Fed, with its stunning views of the James River. He pointed out the bridges from the Civil War era that are still standing across the river. He spoke of the history of Richmond, and how much he enjoys living there. And he spoke with pride about the work that the Bank is doing. I returned home content and very much convinced that, in the Richmond district, financial literacy is in good hands.

Saturday, March 6, 2010

Take the National Financial Capability Challenge

In previous posts, I have described the importance of teaching financial literacy in school, the difficulties in teaching financial literacy, and the need for teachers’ training. In this post I would like to inform readers about the National Financial Capability Challenge and encourage students and teachers to participate in the challenge.

The National Financial Capability Challenge is an awards program designed to increase the financial knowledge and capability of high school students across the United States. It challenges high school teachers and other educators to teach the basics of personal finance to their students, and rewards students, educators, schools, and states for their participation and their success.

All high school teachers and other educators working with U.S. high-school aged students (ages 13-19) are encouraged to register for the Challenge, download the Educator Toolkit, prepare their students, and administer the online exam. Educators who have been teaching students about personal finance for years as well as those who never have before are urged to join this national initiative.

Please note that this is a free program and it works as follows:

Registration: Educators are encouraged to go to http://challenge.treas.gov, view the video message from Education Secretary Arne Duncan, and sign up as soon as possible. Registration is open through March 14, 2010.

Educator Toolkit: Once registered, educators will have access to a free Educator Toolkit that includes ready-to-use lesson plans that cover all the core concepts students need to learn to take the Challenge. Educators are encouraged to use whichever modules they like, use other existing resources, or create their own innovative approaches to teaching these concepts in an effort to help students increase their financial capability.

Challenge Exam: The Challenge online exam, which is designed to illustrate the relevance of financial topics to students, as well as to assess their learning, will be offered from March 15 - April 9, 2010. It will take the average student less than 40 minutes to complete, and each student should take the exam only once. Educators can decide which day to administer the exam and are expected to treat it just like an official exam.

Awards Program: The top two scorers at each school, plus all students scoring in the top 20%, will receive National Financial Capability Challenge Award Certificates. All participating educators will receive an official certificate, and educators from schools and states with the highest proportion of participating students will be recognized as well.

Please spread the word about this important program.

Saturday, February 27, 2010

Financial Education: A Look at Teachers

In previous posts, I have highlighted the importance of teaching financial literacy in high schools. I have discussed student financial literacy and the difficulties associated with teaching. In this post, I want to turn the attention to teachers themselves. Teachers are pivotal to the success of financial education. What do teachers think of financial literacy and how prepared are they to teach financial literacy courses?

A study by Wendy Way and Karen Holden titled “Teachers’ Background and Capacity to Teach Personal Finance: Results of a National Study” published in the Journal of Financial Counseling and Planning in 2009 sheds light on this important issue. More than 1,200 K–12 teachers, prospective teachers, and teacher education faculty representing four census regions responded to questions about their personal and educational backgrounds in financial education. There are several important findings from this study that I would like to highlight:

First, almost all teachers recognize the importance of and need for financial education. As many as 89 percent of teachers agree that students—in order to graduate from high school—should either be required to take a financial education course or pass a financial literacy test.

Second, teachers do not feel prepared to teach personal finance. Fewer than 20 percent of teachers and prospective teachers reported feeling very competent to teach any of the six personal finance concepts normally included in educational standards, such as those identified by the Jump$tart Coalition and in the NEFE High School Financial Planning Program®. Teachers and prospective teachers felt least competent in the more technical
topics, such as risk management and insurance, saving and investing, and financial responsibility and decision making.

Third, state education mandates appear to have no effect on whether a teacher has taken a course in personal finance, has taught a course, or feels competent to teach a course. Several of the states in the study had mandated financial literacy in high school, so while we might expect teachers in those states to be different, that doesn’t appear to be the case. Currently 80 percent of states have adopted personal financial education standards or guidelines, yet the majority of teachers (about 65 percent) in those states admit not feeling qualified to teach to their state’s financial education standards.

These are worrisome findings; while teachers recognize the importance of financial education, they admit limitations in their preparedness and ability to teach personal finance topics. If you feel discouraged, let me turn now to some encouraging findings reported in this study.

A majority of teachers are open to further education in financial literacy. Interestingly, those who report an interest in additional training are those who have had a college course in personal finance or who have backgrounds in vocational education or social studies. While the majority of teachers engage in a number of financial behaviors that typically help ensure financial security, they express the same financial concerns of the general population. In other words, not only do teachers seem interested in engaging in training to teach financial literacy but that same training may offer personal benefits to the teachers themselves.

This is an important study and has several implications for the discussion surrounding financial education in high school. Clearly, it is not enough to simply mandate financial education. Mandates alone do not make people any smarter. Instead, resources should be devoted to training teachers so that they can implement the standards that are required in financial education. Teachers would welcome this education, may themselves benefit from it, and believe in the importance of financial education. Thus, there are good reasons to expect training to be effective.

And parents, community leaders, and all of you “ambassadors” of financial literacy (identified in my previous blog), please be active, too. If our schools are to adequately prepare students, then consistent, comprehensive, and sound instruction in financial literacy needs to be an important component in every school’s curriculum. But, to adequately prepare our students, we first must prepare our teachers.

A link to the paper mentioned in this article is provided below:

Wednesday, February 3, 2010

Strangers in the classroom

I regularly receive e-mails from people who recognize the terrible need for improving financial literacy among young people. Most of the people who write say they want to volunteer their time and teach financial literacy in high school. I am very impressed by how strongly people feel about financial literacy and I have been thinking of ways of harnessing that willingness to help and the generosity of volunteers. Financial literacy is much in need of promoters and organizers. It is a very important issue and we need to work for it.

While I want to encourage everyone to get involved with the schools, I am reluctant to recommend that individual volunteers teach financial literacy in schools, for three main reasons.

1. Contrary to popular belief, it is very hard to teach. I have been at Dartmouth for eighteen years now and I can tell you that every year I have to do a lot of preparation to be able to stand in front of my students and engage them. The first day of class normally ends with a room full of students with baseball caps expertly placed so that I can’t tell whether they are listening or are sound asleep, and a few anxious faces who have been checking their watches for the last 61 minutes of the 65-minute class, and who exit the classroom faster than Speedy Gonzales. And these are the economics students who have elected to be in these classes! It takes a while to filter through the stone faces beyond the first row, and even after years of grueling practice, I barely manage to get through the first half of the term without witnessing a decimated class. It does help to have an Italian mamma instinct, to be armed with limitless patience and unbounded optimism, and to be able to resist the temptation to hang myself from the maple tree outside the window after explaining a concept five different ways and realizing that it is still unclear. If somebody thinks they can just show up in the classroom and teach, I can assure you, it hardly works this way. If you want to teach, you have to be prepared to be trained or the students will “train” you (meaning you will feel like a train has run over you by the end of the class).

2. Individuals seem to have many different ideas about how to approach the instruction of financial literacy. As I have mentioned in previous blogs, financial literacy is a topic grounded in economic and finance theory and it should be taught accordingly. But what I often hear suggested are topics like how to balance a checkbook or how to buy stocks. We need to stay away from these narrow “how to” lessons of financial literacy, as the objective here is to prepare people to understand and navigate a world of complex and changing financial markets. We can’t just tell students how to get from point A to point B; we need to teach them to use a compass. This is no small task and in my view we need a curriculum that teaches the fundamental principals that combine to make one financially literate. Such curriculum development is best done at the national level; inflation does not decrease the value of money differently in Vermont than it does in California or Texas. And while Vermont is much colder than the southern states, it does not freeze how prices work. Once we have developed such a curriculum, there might be a way to engage volunteers in the instruction of it.

3. It’s not always clear how well qualified individuals are to teach financial literacy. In several cases, I have found that college freshmen have set up web pages to teach financial literacy and are eager to go to high schools to offer some classes, even though they may have taken only one introductory course in economics. This is the curse of economics. I have found that many people feel very confident about their views of how the economy works even if they have never read an economics textbook. In other cases, I’ve gotten the impression that people are intent on delivering wisdom and strong values acquired over many years of experience. On the one hand, I am very attracted by the passion that this topic engenders, on the other hand, the dissemination of a sound and consistent knowledge base should be our first priority.

I do not want to discourage anyone who is interested in the pursuit of improving financial literacy in schools. Quite the opposite! Please be involved; do not let the school in your own district not pursue financial literacy, not teach these courses! But perhaps the best role is to be an “ambassador of financial literacy”; be an advocate for financial literacy without going directly to the blackboard. We normally do not let strangers into the classroom, in any course, not just financial literacy. In my view, teaching financial literacy requires a deep knowledge of economics, solid training, and a fair dose of humility. My students would also say that a thick Italian accent helps keeps you awake, but in this case, even that might not be enough!

Wednesday, January 20, 2010

Three Reasons to Teach Financial Literacy in Schools

On December 15, 2009, U.S. Department of the Treasury Secretary Tim Geithner and U.S. Department of Education Secretary Arne Duncan met with students, educators, and community leaders to promote strengthened financial capability among the nation’s youth. They outlined programs to encourage financial education in schools across the country. The need for financial education cannot be overstated. There are at least three compelling reasons to require financial education in schools.

First, it is important to be financially literate before engaging in financial contracts and not after. Yet findings from the Jump$tart Coalition for Personal Financial Literacy, which surveys high school students, and from the National Longitudinal Survey of Youth, which surveys young adults, show that young Americans lack knowledge of basic concepts of economics and finance. This is worrisome as it means that young people are borrowing without understanding, for example, the power of interest compounding and are choosing their investments, including investment in their own education, without knowing rates of return. Young people face many financial decisions, from how to use credit cards to how to buy a car or start a business. Of course, one of the most important decisions that students face right out of school is how to finance their education—an important investment decision both personally and financially. Also, an early grounding in financial literacy sets the stage for engagement in financial education later in life.

The second reason it is important to teach financial education in schools is that financial knowledge is based on scientific concepts—for example, the law of interest compounding and the concepts of risk and risk diversification—and the groundwork for this sort of conceptual understanding is best laid in a formal educational setting. Financial concepts are not necessarily best learned through experience over time or on the advice of friends, family, and colleagues who are not, themselves, financial experts. Some of the most important financial decisions individuals make are not made repeatedly over time. We do not retire many times or buy many houses. Risk management or rates of return are rarely explained to us in easy-to-understand terms; more likely they are reported in long and complex statements printed in 6-point fonts! And financial experiences can be difficult to decipher without some basic knowledge: For example, what is one supposed to learn from the current economic crisis?

The third reason that financial literacy should be taught in schools is to give everyone the chance to learn it. The surveys from Jump$tart Coalition show that the small groups of students who are deemed to be financially literate are disproportionately white males from college educated families. Similarly, data from the most recent wave of the National Longitudinal Survey of Youth show that the young adults (23–28 years old) who are financially literate have college educated mothers and have parents who had stocks and retirement savings when these young adults were teenagers. While this is good news for this limited demographic group, everyone—even those without highly educated and financially sophisticated parents—is faced with financial decisions and we all need the skills to make sound decisions. Some have argued that financial literacy is relevant only if one has wealth. This is a very narrow view. Individuals must make decisions not only about assets but also about debt. And debt is present, even pervasive, across all income strata.

For those of us who believe so much in the value of financial education, seeing Secretary Geithner and Secretary Duncan together on December 15, 2009, was an historical moment. When I look back at 2009, that day—December 15—was one of the best days of a bleak year. For me, it marks the day where we started making progress on an important topic like financial education. I feel better and more optimistic for the new year!

Sunday, January 10, 2010

Wishes for the New Year

I am back in Hanover after a term where part of every week was spent working in Washington, D.C., and I am looking forward to the new year. The beginning of a new year raises hopes and expectations; we expect the upcoming year to be different from the previous one and for things to be better. Our wishes often do not materialize but I have, nevertheless, three wishes for 2010.

In December, the findings from the new Survey on Financial Capability were released. They paint a troubling picture of the U.S. population both in terms of financial knowledge and financial behavior. As has been documented in other surveys, knowledge of basic concepts of finance and economics is lacking in the population. The majority of people do not understand the workings of inflation, risk diversification, and basic asset pricing. Nevertheless, individuals have to decide how much to save to afford a comfortable retirement and how to allocate their pension wealth. Moreover, and disturbingly, half of the population does not have a buffer stock of savings to shield against unexpected events like job loss or emergencies. This makes both individuals and the economy as a whole more vulnerable to shocks. There are many other findings that I will discuss in more detail in future blogs. (The executive report is available at http://www.finrafoundation.org/resources/research/p120478).
My first wish for the New Year is that these findings will provide the stimulus for implementing policies to improve financial literacy and help American families in their financial decision-making.

My second wish for the year is that attention will turn to the groups that need financial literacy the most. One of these groups is women. The Survey on Financial Capability (as well as other surveys) documents that women are lagging behind men in terms of financial knowledge. This is not only the case for older women; it is also true for young women entering the labor market and for high school students. In all of these demographic groups, women are found to be less financially knowledgeable than men. Women are a large and important group. With one in two marriages ending in divorce or separation, women increasingly have to rely on both their earning capacity and their ability to manage resources well to take care of themselves and others. However, very few financial education programs are targeted to women and much more can and should be done to empower women with financial knowledge and financial capability.

My third wish is for financial literacy to be taught in schools. As I have mentioned in previous blogs, financial literacy is an essential piece of knowledge that every student should have. Just as reading and writing became skills that enabled people to succeed in modern economies, today it is impossible to succeed without being able to "read and write" financially—in other words, without financial literacy. Students face formidable financial challenges both during their school years (when they are bombarded with credit card offers) and in the years of young adulthood when they have to make important decisions, including how to finance a college education. My hope is that knowledge and understanding of financial concepts will impact their lives in one particularly important way: the understanding that one of the most important assets they can invest in is their own education.

On a personal level, I will try to stay away from New Year’s resolutions I know I cannot keep, such as shedding these extra pounds (I like eating!), traveling less (the weather and the new security measures are taking care of it), and writing a novel (I am too nerdy for it). But I will continue doing my research and writing my blog. This continues year after year and does not notice the passage of time. It does not even require a special resolution. Happy New Year to all of you!