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 16, 2010
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!
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!
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