Tuesday, December 27, 2011

The new financial literacy seminar series

As December comes to an end, I am thinking of some initiatives undertaken this year. One stands out, as it is rather recent and it is in the process of being evaluated to make it even better: our Financial Literacy Seminar Series. Started last October, this is a joint project between the George Washington University School of Business and the Federal Reserve Board (FRB) with the goal of hosting cutting edge research on financial literacy. We invited all individuals and institutions interested in financial literacy in the Washington, DC, area, and because presentations have been taped and posted on the web, everybody who is interested in financial literacy can watch the presentations or read the papers. They are posted on the seminar’s web page: http://business.gwu.edu/flss/.

We had a distinguished group of speakers in the fall term. Our inaugural seminar was given by Olivia Mitchell from the Wharton School, whose talk examined the link between financial literacy and wealth accumulation. Her talk was followed by a panel of policy experts, including Gail Hillebrand from the Consumer Financial Protection Bureau, Karen Dynan from Brookings, and Jason Fichtner from George Mason University (formerly the Deputy Commissioner of SSA). In subsequent seminars, Robert Clark from North Carolina State University presented his work on workplace financial education, a very important topic when looking at financial education for the adult population; Stephan Meier from Columbia Business School examined the link between financial literacy and subprime mortgages, showing that numerical ability is strongly associated with mortgage delinquency and default; Bilal Zia from the World Bank presented an evaluation of financial literacy programs in India; and Jonathan Zinman from Dartmouth College examined household debt and, in particular, credit card debt and the way it could be managed better. Our last speaker was Brigitte Madrian from Harvard University. She reported on some important features of default options, i.e., the fact that when employees are automatically enrolled into pensions, many of them stay enrolled at the default rate, even when that rate is a “bad” one and unlikely to correspond to a rate that the individual would have chosen had he/she made an active choice. Most importantly, the employees who tend to stick to the default are disproportionately those with low income, which is often a proxy for low financial literacy.

Different seminars in the series had different formats. While the majority of talks were given by academics, at times we had a discussant or, as mentioned above, a panel of policy experts. Even without a discussant, our audience had so many experts in this field that there always was a very lively discussion with many questions asked of the speaker. To continue the discussion in a less formal setting, we held a reception after the seminar so that participants could continue the discussion with either the presenter or other attendees (sometimes with the help of a glass of Italian wine). The Dean of the Business School would also stop by the reception to greet the speaker or meet the attendees and to hear how the School could continue to promote financial literacy.

One of the privileges of organizing the seminar series is that I get to meet with the seminar speakers, discuss their paper in depth, hear in more detail their views and their insights as well as learn about their future projects. Another equally important privilege was getting to know and work with a group of researchers from the Federal Reserve Board. They have been a great group to work with: they combine an interest in theoretical and empirical research with a focus on policy; they ask important questions and have very high standards for research. Together, we were unstoppable; we started to work on the series in August and in October we were ready to start.

And speaking of privileges, last June, I had the opportunity to meet with Chairman Bernanke. Sitting in his elegant office at the FRB, I told him about the projects that our teams at the Financial Literacy Center (FLC) were working on and what we were doing to promote financial literacy. He proposed more interaction between the researchers working on financial literacy and the researchers from the Federal Reserve Board and suggested organizing some joint activities. As a result, the Financial Literacy Seminar Series was born, and it benefits from the financial support of the Federal Reserve Board. Because the end of the year is a time for evaluation, I have to say I am very proud of our new Financial Literacy Seminar Series. And I am especially proud of being a student of Ben Bernanke.

Thursday, December 8, 2011

Learning from Elsa Fornero

The front page of the Wall Street Journal last Monday, December 5, had three pictures of a woman in tears. That woman is Elsa Fornero, the Welfare Minister in the new “technocratic” government of Italy. The fact that she was in tears was truly remarkable and it deserved to be on the front page of a major business newspaper. This is something new, and there is a lesson to be learned from it.

Elsa Fornero, a professor of Economics at the University of Turin, is an international expert on pensions. In charge of one of the most difficult reforms, i.e., changing the pension system in Italy, she has set out to implement a set of new and severe measures that nobody before her has been able to do, even though the current system is unsustainable.

Reforms might be right, but they are painful, and the fact that they are necessary does not alleviate any of the pain they inflict. Technocrats normally describe necessary reforms as the inevitable medicine that a country has to swallow to get better; the numbers are on their side, and no one had ever shed a tear when reform might mean that someone wouldn’t be able to pay their bills at the end of the month. But not Elsa Fornero. The woman who, for more than forty years, has done the calculations about the pension system in Italy; has shown in many scholarly papers that the Italian pension system is unfair, inefficient, and too expensive; has set up a center to study this topic in the most rigorous way, looking at data both in Italy and in other countries, was there at center stage to announce her reforms. The new Minister, who was appointed for her unique expertise, stopped speaking at the very moment she had to pronounce the word “sacrifice”—and cried.

This is not only a sign of humanity, a recognition that reforms often equal pain, but also an act of humility and of immense courage. It took a woman to attack reform of one of the most difficult and stubborn pension systems. She had one week to do it. She knew what to do and what was necessary. And when she described it, she told it as it is, and she cried.

I hope this is the start of a new phase both for politics and for women. Politicians need to have the skills and good judgment to set countries on sustainable paths and (financially literate) citizens should hold them accountable. And I hope we are done with the “iron lady” and similar clichés about women in command. I highly recommend that other Italian politicians be so bold in their actions as the Fornero reforms, as well as show that they care about the well-being of their fellow citizens. We all can learn from Elsa Fornero to be ourselves; in her case, a woman who cares. When I grow up, I want to be Elsa Fornero.

Monday, October 24, 2011

We are All Blacks!

This has been a busy fall so far with a lot of travelling (I am on my way to Sweden), starting a new financial literacy seminar series (more in future blogs), and keeping up with my newly acquired interests: football and rugby! It has been a season full of exciting games, including the Rugby World Cup, which was held in New Zealand. I am extremely happy to announce that the New Zealand All Blacks are the World Cup champions! I am ecstatic and wish I were in New Zealand to celebrate their victory. What could be sweeter than winning the World Cup when your country is the host and your fans are in the stadium? I can only imagine the explosion of joy in Eden Park in Auckland at the end of the match with France (and the sense of relief as well since the score was so close, I could hardly breath...).

I will celebrate this great victory by writing about New Zealand and the role they have played in the field of financial literacy. Under the leadership of feisty Diana Crossan, the Retirement Commission has done a lot of innovative work on financial literacy. I mentioned in a previous post that they have one of the best national web sites dedicated to improving the financial literacy of the population. They were also one of the first countries to conduct a second national financial literacy survey in order to measure financial knowledge over time and therefore assess their progress in improving financial literacy. They have many programs targeted to specific groups of the population, recognizing that different people have different needs and different economic circumstances. One group of great interest is the Maori, and specific programs have been designed for them as well. While small and without a big budget, the Commission is a mighty group. And to better communicate the focus of their work, they have recently changed their name from Retirement Commission to the Commission for Financial Literacy and Retirement Income. The main lesson here is not to underestimate the power and ingenuity of what one institution—however small—can do for financial literacy. And while New Zealand is a small country, it has been a model to look to for financial literacy.

I have one recommendation for Diana Crossan: go to that talented captain of the All Blacks, Richie McCaw, show him your muscles (figuratively, I mean), and ask the team to support financial literacy. I am sure a lot of New Zealanders would pay attention. In my view, sport and financial literacy go very well together (wink)!

But for now, congratulations to the All Blacks and to New Zealand for being World Champions and hosting the World Cup. Bravi!

Tuesday, October 4, 2011

Financial literacy, the Maori, and … rugby

I am just back from Australia and New Zealand and will write first about my trip to New Zealand. I was invited to attend a meeting at the University of Otago with representatives of the Maori population, who have become interested in financial literacy. If you do not know the Maori, they are the indigenous people of New Zealand and represent about 15% of the population today. Their name is derived from “Ma-Uri,” which means “children of Heaven.” Maori comprise many “iwi” (tribes), “hapu” (subtribes), and “whānau” (extended family units). Having originated in Polynesia, they brought with them the rich culture of the region, where song, dance, art, and oratorical skills were significant, especially as there was no written language at that time. On my visit to New Zealand a couple of years ago, I went to Rotorua, a town settled by the Maori on the North Island. This time, I was in Dunedin, on the South Island of New Zealand, home of the Ngāi Tahu. See below a picture of the formal greeting among the Maori.

In one of the papers that is part of an international comparison of financial literacy across countries, which I have edited for a special volume of the Journal of Pension Economics and Finance, a research group in New Zealand headed by Pension Commissioner Diana Crossan documented differences in financial literacy among the new Zealanders of European descent and the Maori population; the Maori tend to know less. However, this is not the case for the Ngāi Tahu, and one explanation offered for this finding is the fact that Ngāi Tahu have promoted a series of programs aimed to increase financial literacy and saving. A description of Whai Rawa, their matched saving initiative, is provided on the web page noted at the end of this post. The meeting at the University of Otago was about trying to measure the effectiveness of the new initiatives and changes in the well-being of this population over time.

It felt special to sit among this group. The meeting opened with the traditional Maori greetings, and much of the discussion and questions were led by one of the Ngāi Tahu representatives. He was just as one would expect a chief to be: charismatic, wise, and pragmatic. His questions to me were remarkably similar to the ones I often hear when I travel around the world: What is the business case for financial education? What works? and How do we know that it works? But there were major differences, too. The Ngāi Tahu’s planning horizon is very long. Their vision is “For us and our children after us” (Mō tātou,ā, mō kā uri ā muri ake nei). They feel strongly about their community and about sustainability of resources over time. I came away with not only a deeply felt respect for such foresight but also admiration for this capacity to lead and look ahead.

You may know about the Maori from the “haka,” or war dance, that the New Zealand rugby team performs before each game (if you have not seen it, you have got to watch the video posted below). I like the haka for many reasons. First, it shows how much the Maori traditions have been embraced by the population in general. Maori or not, every player in the rugby team plays the haka very seriously. Second, one wants to build up energy at the beginning of an important event. Third, it scares the hell out of the opposing team. And this brings me to my next topic: rugby! New Zealand is currently hosting the Rugby World Cup. Their national team is the All Blacks, and I spent a good part of my time in New Zealand watching rugby. The All Blacks are amazing players and I was glued to the TV for hours. On Sunday, I went to the stadium in Dunedin to watch Italy against Ireland. We (Italy) did not win, but we put up a good fight against the Irish; it was a good game. On the first leg of my trip back to the U.S. on Air New Zealand from Dunedin to Auckland, the flight safety video was done by the captain and the coach of the All Blacks and everything on the plane was about the All Blacks, including pictures of the players on the coffee cups. Believe me, they are irresistible! One advertisement said: “we are crazy about rugby.” Well, for a week I was too.

Kia ora.


Sunday, September 11, 2011

Advice to rookies

If you’re a regular reader of my blog, you’ll know that I have become a football fan. People change over the course of their life and pick up new hobbies and interests. For me, it’s football. So this Sunday, I watched the Ravens score a crushing victory against the Steelers. It was a beautiful game! I also watched the kickoff last Thursday. Two games in a week; that is pretty good for a rookie fan, no?

In this new season, with rookie players on their field for their first games, there is an abundance of discussions and articles about these newcomers. In the New York Times yesterday, there was an article about finance and financial advice to the rookies. The link to the article “Financial Lessons from Sports Stars’ Mistakes” is at the end of this post.

As I have mentioned in previous posts, the statistics about football players mismanaging their money are pretty staggering. The article mentioned several star athletes who have had brushes with bankruptcy: Michael Vick (recently acquired by the Philadelphia Eagles); Bernie Kosar, formerly of the Cleveland Browns; and Mark Brunell of the New York Jets.

Some have argued that the behavior of football players is similar to those who win the lottery. Flushed with large sums of money that come to them suddenly, players squander it and are left with little or nothing a few years out. I do not think that this is a good analogy. One difference between football players and lottery players is that we know the former are very talented people: Who else could do the things they do when they are out in the field? Moreover, these people know discipline; they show up to practice every day. They also know the correlation between efforts and outcome; if one works steadily at something, he will get better. These are great skills that can be applied not only to playing football but also to managing money.

So, why do we see players going bankrupt? One of the reasons why people (including football players) make mistakes is because they lack financial knowledge. This problem can be particularly acute for young, inexperienced people whose highest earnings are concentrated at the beginning of their career. But this is not an impossible problem to fix, and the New York Times article outlined a set of lessons that could be learned from some players’ mistakes.

I have three pieces of advice for rookies. (There is more advice to give, but let me start with this simple list; I will follow up in future posts.)

1) Do not spend it all. The career of football players is short and risky; you want and need to have provisions for the future and for uncertain events. An example? The recent lockout. What would have happened if the lockout had continued? Another example? Even superstars have injuries and/or cannot play for health reasons. Peyton Manning, for example, just had neck surgery.

2) Take it in your hands. Money management is too important and too personal to be delegated entirely to someone else. You are the one who knows your needs, your aversion to or love of risk, your objectives for the future. If you leave it to others to manage your money, chances are they will not make the decisions you had wished for. Even if you seek financial advice, rely on reputable experts and stay involved in the process. After all, it is your future that is at stake here.

3) Be humble about finance. My research repeatedly shows that the majority of people are overconfident about what they know of finance. Four out of five Americans gave themselves high financial knowledge ratings but, when asked questions about basic concepts, they answered incorrectly. And ignorance hurts. Study after study documents that it is those with low financial knowledge who pay more for financial services and who are more likely to end up in financial distress. Do not be afraid to speak up about what you do not know; it is not a weakness, it is a strength, and you will intimidate anyone around you when you admit it. Most people do not have that kind of courage. Do not jump into projects or investments you do not understand well. Tell people around you, “I want to be smart about my money.” Over time, you will be.

When I got my first job as an assistant professor at Dartmouth College about twenty years ago, I showed up in the Human Resources office and was given all of these forms to fill out, requiring me to indicate which of the three pension providers I wanted and how I would allocate my pension money. I remember feeling puzzled that such an important decision would be asked of me without inquiring about my knowledge and whether I needed any help. Throughout the years, I have worked to change that process and, with the collaboration of some great people at Dartmouth’s HR office, there are now programs in place to help new hires. I take a little pride in that.

The NYT article is posted here:

Tuesday, September 6, 2011

Think big, in a practical way

I left for Italy in mid-August feeling pretty discouraged. Most of the recent discussions I had heard about financial literacy were focused on cost. This is clearly an important concern, but, in practice, when people talk mostly about costs, it often means they are not interested in “buying” it. And while the cost of improving financial literacy is a very legitimate concern, how about the cost of this financial mess we’re in. How about that?

The discussion around some financial education programs was also not a mood booster. Some of the papers I saw presented this summer covered programs in which individuals—often impoverished and with little education—were brought to a classroom and given a few hours of “financial education.” The expectation was that those few hours would transform people into savvy entrepreneurs or investors. And what was the main discussion around this? How much these programs cost!

This dominant concern about cost obscures the fact that we face a very important and challenging problem in need of a solution. But we need to think big; we need creative ideas that can help overcome big barriers. Lack of financial knowledge is not something that can be tackled by bringing the adult population back to a classroom for a lecture or two on financial education. We need to be practical, too, regarding what can be implemented. As my college friend—a successful entrepreneur I get together with every time I return to Italy—put it: "think big, in a practical way."

Being in Italy, with a break from my daily routine, allowed me to focus on big ideas, and I have some recommendations, that are also practical, to at least start the discussion, and I would like to hear from others.

Big Idea #1: TEACH THE YOUNG. Financial literacy needs to be implemented in schools. It is too difficult to reach the adult population and it is hard to do any teaching if there is little or no base to start from. Also, we need people to be financially literate before rather than after they engage in financial transactions. There will and should be costs of educating the young. It is meaningless to mandate financial education without, for example, training the teachers to teach those courses. Mandates do not make people any smarter, but having a well-developed curriculum that is followed by trained teachers might.

Big Idea #2: FOCUS ON WOMEN. Women have low levels of financial literacy (lower than men), but they also know that they lack knowledge. Moreover, they want to be “treated”; in most financial programs I have been involved with or read about, the majority of participants have been women. It is going to be much easier to reach and deliver to a population who is interested in financial literacy. This is a simple truth that has been mostly ignored. There are costs of only thinking about costs!

Big Idea #3: MAKE IT SIMPLE. Some financial decisions are truly complex, but there are universal concepts that are at the basis of most financial decisions and that can and should be explained in very simple ways. I am talking about the power of interest compounding, the effects of inflation, and the benefits of risk diversification. In fact, even this is economic jargon we can get away from. Let’s use plain English and explain these ideas in very simple ways. We can even come up with ways to tell stories to teach the concepts so that even a five-year-old could learn them.

Speaking of five-year-olds and of being practical, I was given the following test to see whether one can think practically. Here it is: How do you put a giraffe into a refrigerator? The answer is at the end of the post, but please do not look before you come up with your own solution. I thought about it for five minutes and came up with a method about as simple as putting a man on the moon. That evening, I saw my little niece Giorgia drawing a picture of the family dog, depicting him with 9 legs and 2 enormous eyes. I thought she would be an ideal person for the giraffe test, so I asked her very innocently: “Giorgia, how do you put a giraffe into a fridge?” She looked up, gave me a big smile, jumped from her chair, and ran to the fridge. Moral: you can never beat the creativity of a five-year old!

Question: How do you put a giraffe into a refrigerator? Answer: You open the door and put the giraffe in.

Saturday, August 27, 2011

Ten questions and things to know about financial literacy

While on vacation under the Italian sun, I was asked a lot of questions about financial literacy. Rather than writing a blog post about a single topic, I thought it might be useful to answer some of the questions I’ve been asked in order to hit on a lot of general information about financial literacy. So, here is my list of the top ten questions and things to know about financial literacy:

1) What is financial literacy?
Financial literacy is like reading and writing. It is the knowledge of basic but essential concepts that are needed to be able to operate in today’s society.

2) How do I know whether I am financially literate?
You can take a test here:

3) How do I compare with respect to others?
The above test will tell you how the average American responded to five financial literacy questions. If you live in the U.S. and you want to know how financially literate people in your state are, check here:

4) How does financial literacy in the United States (or Italy) compare with respect to other countries?
We have done a comparison of financial literacy across eight countries (the U.S., Italy, Germany, the Netherlands, Sweden, Russia, Japan, and New Zealand). In a nutshell, the world is flat in terms of financial literacy! You can read about this work here (warning: these are long papers but still fun to read)

5) Why should I become financially literate? Can’t I be happily ignorant?
There are costs of being financially illiterate. Studies show that those who have low financial literacy are less likely to take advantage of the opportunities offered by financial markets (for example, refinancing mortgages when interest rates go down or getting higher returns by investing in stocks and bonds), are less likely to invest in mutual funds with low fees, and are more likely to have problems with debt and to pay higher borrowing costs. Overall, ignorance is not bliss.
An overview of these studies is provided in this paper:

6) Where do I go for information if I want to improve my financial literacy?
For readers in the United States, a reliable and independent source of information is www.mymoney.gov. One of the best web sites for financial literacy is New Zealand’s national site. Here is the link (after all, we are going global!):

7) What if I want to have fun while I’m learning?
Excellent idea! Doorways to Dreams has designed financial literacy games, so you can become financially literate while having fun. Here is their financial entertainment website:

8) What do I do to promote financial literacy and to become financially literate?
Ask for financial literacy programs in your school, your workplace, and your local library. Become an ambassador for financial literacy.
Three examples of initiatives or tools to use are here:




9) Who is promoting financial literacy? Just academic nerds like you?
Are you kidding me? Here is a list of people (and one puppet) who are promoting financial literacy.
(i) Elmo, puppet and TV celebrity (for you younger readers):

(ii) Ben Bernanke, Chairman of the Federal Reserve. You can read one of his recent speeches here:

(iii) Ray Lewis, football star. You can read about one of his talks here:

(iv) Both President Bush and President Obama have been supporters of financial literacy, via, for example, the President’s Advisory Council on Financial Literacy

10) Are there any big initiatives happening on financial literacy?
Yes, there are many. One important initiative is that of the OECD (Organisation for Economic Cooperation and Development). Starting in 2012, the OECD’s Programme for International Student Assessment (PISA) will measure financial literacy among 15-year-olds in 19 countries. You can read more about this important initiative here:

Monday, August 15, 2011

No Roman Holidays

I am in Italy where, it has been said, even the statues go on vacation in August. While this is the feeling one normally gets in the summer, the Italian government, under pressure from the European Central Bank, has just—in a short period of time—put together a series of decisive reforms. Little was left untouched, from cuts that reached into the pockets of politicians, from whom many privileges have been taken, to the abolition of small provinces to reduce the costs of local governments to tax increases —including a new “solidarity fund” which will require temporary tax increases for those whose income is above 90,000 Euros—to increases in the pension age for women (a gradual move from age 60 to age 65).

This was no Roman holiday (for those of you who have seen the wonderful movie with Audrey Hepburn and Gregory Peck) for the Italian politicians, who have used all of the tools at their disposal to rein in the deficit and tackle a public debt as high as 120% of GDP. And for those who think these are the reforms that Socialist Europe makes, I want to remind readers that Italy, in fact, has a right-wing government. For those who wonder why this was not done before, I would argue that this is a good way to use a severe crisis (no crisis should be wasted) to convince both citizens and politicians that changes are necessary.

The reason I have chosen this topic for this blog posting is that in many countries around the world the crisis has profound consequences, with or without changes in government policies. In the newspapers, the first pages are now dedicated to economic news. Long articles are written about the reactions of the financial markets, about the spreads in the government bonds of different countries, and about the economic measures that countries have taken in reaction to a severe crisis.

This is another reason why we need financial literacy. Every day we read and hear economic news. This news is not only affecting or reflecting the macro economy but has an effect on our lives. The behavior of financial markets is affecting our savings, our cost of traveling abroad, our capacity to retire or to donate to the initiatives we deem important. Similarly, the changes in economic policies are affecting the services that we get from the government, our income, our capacity to find a job or to get a good education. We need to be able to understand what this news means, we need to be able to take advantage of the opportunities offered by the financial markets, we need to be able to understand the causes and consequences of the economic reforms that governments are proposing to us. And it is perhaps in a time of economic crisis that we need financial knowledge the most.

So, while Italy pauses during this national holiday, I am writing a new blog post about financial literacy because it is a regular Monday in other countries, because many stock markets are closing with moderate gains today, and because economic crises may even bring good things, for example new and much-needed economic reforms.

If some of you are wondering what I will do with my non-Roman holiday, I will do three things: bask in the sun, go to the opera, and of course write more blogs.

Tuesday, August 9, 2011

Financial literacy for politicians

I have argued in my blog postings that individuals need financial literacy because we are increasingly asked to make financial decisions that have important consequences. But there is a group for whom financial literacy is even more important, since their decisions are going to affect the whole population. These are our politicians.

As a case in point, the consequences of the standoff about the debt ceiling are severe. For the first time in history, the US debt has been downgraded from AAA to AA. This could mean higher interest rates, for example, on mortgages or car loans, and thus higher costs for many consumers. The stock market gyrated last week, dropping sharply, and it dropped more than 600 points on Monday, destroying in less than a week most of the gains that had been made slowly over many months. These are serious problems that affect real people!

When politicians make decisions with such consequential economic implications, they must be financially literate. Consumers learned about the costs of financial illiteracy during the financial crisis; politicians will likely get their lessons soon, if what they want to see is what happens to an economy in which basic economic principles are ignored.

There have been a number of statements by politicians that reveal their financial illiteracy. One example: the argument that it does not matter (or we should not care) if the world is watching or what the world thinks of how the US handles the debt ceiling. This is unfortunately wrong. A large portion of US debt is held by the Chinese, and so it does matter what other countries think of the discussion about the debt ceiling, and politicians should care—in fact, they should care a lot. Another example: the suggestion that we should let the government default to demonstrate how important it is to reign in the deficit. This is strange financial decision-making. It is the equivalent of a household wanting to burn down the house to discipline its members. I would recommend trying that strategy on a desert island but not in a country inhabited by 300 million people.

I doubt financial illiteracy is concentrated in one political party only. We have witnessed poor economic decisions a lot in the past few years. Having public debt on an unsustainable path is not only problematic, but it provides a bad example to citizens as well. Not just the federal government but also state and local governments have done a poor job in keeping their finances in order.

The decisions that politicians make have enormous implications for the economy and for all of us. We are the ones paying the cost of the decisions that are made. We should demand that the politicians we sent to represent us and who are bound to make these important decisions be financially literate and explain their decisions to us in economic terms. A fragile economy that has survived a very severe crisis and is trying to recover from a great recession needs politicians who understand basic economic principles, now more than ever.

Sunday, July 31, 2011

The NFL is Back

I was very happy to hear that the NFL lockout was over, and I have been avidly reading the sports section of the newspapers. I normally read the business section, but this week I could not bear to read the discussion about the debt ceiling any longer, and it was good to go straight to the sport pages. While attending the National Bureau for Economic Research (NBER) Summer Institute last week, I startled a few economists with my conversations about football; I enjoyed that!

There are four things I like about the agreement that was reached last week:

1) Players’ safety and health. The agreement limits on-field practice time and contact. Importantly, it limits full-contact practice in the preseason and regular season. Who needs concussions? I was appalled at the statistics about injuries among football players when I read them. These are serious issues and I frankly wonder why it took so long to worry about players’ safety. This discussion has already trickled down to college football, and I was very happy to see that the Ivy League colleges have also adopted a limit to football practices to reduce head injuries. Importantly, the new agreement provides enhanced injury-protection benefits and an opportunity for current players to remain in the player medical plan for life. It also set up a fund for medical research, health care programs, and NFL Charities. These are smart features; a big thumbs up.

2) Benefits for retired players. The agreement provides additional funding for retiree benefits and sets up a fund to increase the pensions of pre-1993 retirees. This is also a good and needed program. The career of players is often very short (and cut short by injuries as well) and it is hard to accumulate a good pension during a short career (let alone think about pensions when one is 22!). We have read too many stories of players running out of money after they stop playing, and it is important to find ways to provide for the players’ future. Another thumbs up.

3) Improvements to career transition and degree-completion programs. Because, as already mentioned above, the career of players is short, it is important to provide help in their career transitions. Players have very specific skills that can be used well in sports but also in other fields, but they need help in translating those skills or simply in being connected to other fields. Some players have not completed their college education and, given the returns to higher education, it is beneficial to facilitate and help players finish their degrees. A thumbs up here as well.

4) Sharing among players. To those who believe players are greedy and want absurdly high wages, I would like to point out there are absurdly high amounts of money on the table, and the projections are for high growth in that money in the future as well. In fact, players have agreed not only to a stricter salary cap but a new fund will also be created to redistribute savings from the new rookie pay system to current and retired-player benefits and a veteran-player performance pool. And we have now heard news about Peyton Manning staying with the Colts but passing up being the highest paid player in NFL history. This will allow the Colts more flexibility to sign other players. This is the statement Manning made: “Whether I deserve to be the highest-paid player over the next five years is irrelevant. I would rather them use the money and keep the players they want to keep and get other players.” One thumbs up to Peyton Manning. Another thing I want to remind readers is that players donate generously. Many have their own charities and are very sensitive to social issues related, for example, to poverty, education, and discrimination. Because of that spillover, I would have preferred to see more rather than less money going to the players.

But the best news is that we will be able to go see the games. I am getting ready to not only watch them on TV but to go to the stadium. As for the other lockout (about the debt ceiling), I think politicians could learn a thing or two from the NFL.

Monday, July 25, 2011

Hopes for the Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau (CFPB) officially opened its doors on July 21, 2011. Established by the Dodd-Frank Act, we finally have an institution that, as the name says, will be devoted to protecting consumers. This is an important milestone. It is not possible to live in a world of individual responsibility without at the same time having a structure in place to protect consumers. This is not just a political choice, it is an inevitable step to take when we put people in charge of their financial well-being. The shift in responsibility from governments and employers onto individuals has stemmed from changes in the age composition of the population (an increasingly elderly population) and in the increased mobility of the labor markets (which requires that pensions be portable), and I do not see a way of going back to a system dominated by, for example, defined benefit pensions. But consumers face a formidable task, particularly now that financial markets around the world have become very complex and the choice of financial products has dramatically expanded.

I have several hopes for the Consumer Financial Protection Bureau.

• First, I hope they will set the right expectations about what they can accomplish, in particular in the short run. Protecting consumers is a very complex task; it requires a combination of both regulation and financial education, and it will take time to get that combination right. Having the Bureau does not make people smarter overnight, and—given widespread financial illiteracy—the Bureau has a challenging task in front of it. I can already envision front-page news articles the next time we will experience financial troubles (and there is trouble to come; more on this below), which will argue that despite the existence of the CFPB, we have not prevented financial woes. Having the CFPB does not mean that consumers will not make financial mistakes or that the supply of financial products will have no flaws. While the Dodd-Frank Act provides guidelines on what the Bureau should do, it is very important to make clear what it can realistically aim to accomplish in the short run.

• Continuing on the previous point, I hope that the Bureau will devote ample attention to financial education. One of its mandates is to promote financial education but, as we know, education inevitably takes time—and no one has time; no one can wait. But, as Federal Reserve Chairman Ben Bernanke has said, “well-informed consumers, who can serve as their own advocates, are one of the best lines of defense against the proliferation of financial products and services that are unsuitable, unnecessarily costly, or abusive.” We need an institution that has the brains, the courage, and the vision to think beyond the short run. In this respect, the Bureau could set itself apart from other institutions intent on pleasing people, politicians, or voters, with no consideration for the future. Myopic policies are costly and these costs will eventually be paid (young people, be warned). Most of our financial decisions have to do with transferring resources to the future (for example to pay for expenses after retirement or for children’s college education), and we need institutions with a long planning horizon.

• Third, I hope that the Bureau will pay careful attention to what has happened during the recent financial crisis but it will also look ahead and be proactive in addressing potential future problems. There are early indications of serious problems brewing inside the Defined Contribution pension system. There are also problems regarding how people assume and manage debt. These are issues that emerge when looking at data, and is important to use that evidence for prevention.

• Finally, I hope the Bureau will focus its efforts on those who need protection the most. While everyone will benefit from the existence of the Bureau, it is clear that there are vulnerable groups in society that deserves particular attention. These groups include not only the young and the old, which have been shown to display alarmingly low levels of financial knowledge, but also women, those with low educational attainment, and African-Americans and Hispanics. Again, the data speak clearly about who the vulnerable groups are and also provide suggestions on how to protect those vulnerable groups.

The CFPB is an institution that can make a difference in people’s lives. I want to remind you that we are all consumers; we all make financial decisions; we all need fair treatment in the market and financial products that serve our needs well; we all have grandparents, children, and female and minorities friends who are part of those vulnerable groups. Personal finance is, well, “personal.” We should not forget about that, and we should take time to recognize that with the CFPB we have made one important step forward. It’s about time.

Wednesday, July 13, 2011

Teaching the STARs

I recently taught a class on financial literacy in the new STAR EMBA program that the George Washington School of Business (GWSB) just launched. This is a new Executive Master in Business Administration (EMBA) for Special Talent, Access and Responsibility (STAR) students, targeted to athletes, celebrities, and others. For those who do not yet know, I have moved to GWSB, so you can say I went from teaching the little stars (Dartmouth undergraduates) to teaching the bigger stars (athletes and celebrities).

Programs like this one are much needed and fill an important gap. Irrespective of high salaries and lucrative contracts, an athlete’s career is normally very short and often riddled with injuries. Ken Ruettgers, a former NFL player and now the executive director of GamesOver, documented that 78% of NFL players are bankrupt, divorced, or unemployed two years after retiring. This is one of the ugliest statistics I have seen. As Doug Guthrie, the dean of GWSB, stated succinctly: “These individuals need help translating their special talents and access to resources at a very early stage in their lives into the business skills that will help them elevate their personal brands into business dreams that will change the world.” I particularly like the latter part of the statement. These are extraordinarily talented individuals who were recruited for the EMBA program because of their enormous potential to make an impact.

The program is customized to fit these students’ needs, including their playing seasons (several of the football players in class are still active). Thus, it started with two weeks of full immersion in many courses in Washington, DC, and will continue in the heart of the financial capital (New York) and on the West coast, in Los Angeles. Spouses were also accepted and very much welcomed into the program, and out of 23 students, we had four couples in class.

In spite of their special talents, the group, in many ways, behaved very much like regular students. After a few days, they were wearing GW T-shirts or caps, were complaining about homework, and had found the strategic places in the classroom where they thought they could surf the internet, respond to e-mails, or finish their assignments without being noticed (we saw them, of course). There were differences as well. After a few days they stopped eating the catered lunches (too many calories I guess); regular students would never pass up buffet lunches. They went regularly to the gym, many of them looking so super-fit that I could not avoid feeling very wimpy.

But beyond these differences, they were not, by any means, a regular class. Their insights were profound and they startled a few faculty members with their comments. They did not speak a lot in class, but when they did, they were succinct and nailed a point, as if there was no margin for error. Even though they were soft-spoken in class, I could sense their confidence and determination. I admired the female basketball players’ toughness—they had played in several countries, spoke many languages, and one of them, more than 6 feet tall, was wearing very high heels!

We knew we had great potential to work with. We knew we could push these students for more work, give them challenges, and expect the best. These students know endurance, the importance of hard work, the correlation between effort and results. As I looked at this class of football, basketball, and baseball players; Olympic gymnasts; and poker players, I knew I could expect a lot from them. I also knew they expected a lot from me.

My class on financial literacy was divided into three parts. In the first part, I discussed why financial literacy has become important for each of us, what the consequences of financial illiteracy are, and why—in a new world of individual responsibility—financial literacy is an essential tool for making financial decisions. In the second part, I discussed why financial literacy is especially important for athletes: given their short careers, good planning is particularly important, as is an understanding of how to grow and protect wealth to make sure that resources last a lifetime. While most people get rich later in life (apart from those pesky Harvard students who invent Facebook while in college), athletes are rich early in life, so they have to learn in their twenties about trusts, wills, and prenuptial agreements. In the third part of the class, I discussed how these students can make a difference in promoting financial literacy. My discussion here was focused on the divergence of wages between those with and without a college degree and the fact that high school students are asked to make one of the biggest investments of their lives—the investment in education—without having any notion of this basic concept or of the basics of economics and finance. I discussed what athletes can do to make a difference in the lives of the many young people who look up to them.

For those of you who think that we professors just show up in class and teach off-the-cuff, let me tell you that I prepared a lot for this class and was quite nervous at the idea of teaching this group of students. Several weeks ahead, I started reading about the different sports played by the athletes who would be in my class. For example, I read lots about football and football players: rate of injury, lengths of careers, what it means to be drafted. Because I did not know anything about the game, I read “Football for Dummies,” so at least I knew what a linebacker is and could understand the dossiers of the athletes in my class. I read the sport pages of the newspapers and read sports magazines (I understood half of what they were saying, but there were some good stories). At the end of the class, I went to talk to one of the students, who is a football player for the Baltimore Ravens. I had mentioned the Ravens a lot in class and talked about Ray Lewis (of the Ravens) as an example of an athlete who cares a lot about financial literacy, and I wanted to tell him that I think the world of Ray. He jokingly suggested I come teach the Ravens. When I told him I didn’t know whether I could really teach a whole team, his reply hit me like a ball in the head: “Yes, you can. Because you can relate to us.” I always prepare for my classes because I want to know who my students are, what they need, and to make the class relevant to them, but no student ever told me “you can relate to us.” I’ve been teaching for close to 20 years, and it was a linebacker from a football team in Baltimore who best articulated what teaching means for me and what I strive for every day in the classroom. I never felt so good. As I told you, these people are truly special, they are STARS!

Thursday, June 30, 2011

The courage of women

I want to cover a topic that is not discussed much in the world of finance: the courage of women. In an arena in which women have been scarce and where financial genius and wizardry are often synonymous with being male (and there are many excellent men out there), it’s interesting to note, by gender, some of the key players in financial events of recent years.

In a world where corporate interests have a big voice, it was a woman who stood up and advocated protecting the consumer, the “little guy.” It was a woman who promoted regulation of the derivatives market, an arcane market that few understood well but in which immense risk could be taken. It was a woman who blew the whistle on Enron and its overinflated evaluations. And the list goes on.

In the same time frame, we witnessed Bernie Madoff carry out an enormous Ponzi scheme that defrauded individuals of their retirement savings and institutions of their endowments. And it was a young derivatives broker who brought down Barings Bank, one of the oldest of the United Kingdom’s investment banks. This dude even had the audacity to write a book titled “How I Brought Down Barings Bank and Shook the Financial World.” Another male trader almost took down France’s second-largest bank. The former head of the International Monetary Fund, which had been dealing with the financial situation in Greece, which is threatening the very existence of the Euro, has been under house arrest. And the list goes on.

At the risk of making gross generalizations about gender and finance, the above outline makes me hope we will begin giving truly serious consideration to furthering the role of women in the financial world and start opening doors more widely to them. One useful role I could see for women is in curbing the excesses that we have witnessed in recent years and that have caused some venerable firms to go knocking at the doors of government for help. The risk-averse attitude of women (considered a fact but hardly documented in the data), often considered a weakness, may turn out to be a strength. As women rise to the top, I hope their voices will be heard.

Some progress has undoubtedly already been made. The top regulator of financial markets and head of the Security and Exchange Commission is Mary Schapiro. At the Department of Labor, Phyllis Borzi is the Assistant Secretary of Labor for the Employee Benefits Security Administration, whose mission is to protect the security of retirement, health, and other employee benefits for America’s workers and to support the growth of the private sector employee benefits system. We are talking about trillions of dollars here! The endowments of some of the wealthiest universities, such as Harvard, are managed by women, and many Ivy League colleges and universities (which are some of the richest institutions in the United States) are headed by women. We have yet to see any woman go down in flames from their seats at those positions of power, but, of course, history will tell. The helm of the International Monetary Fund will be given to a woman. This is another milestone, though I wish women were not brought in only when crises occur and when everyone—man or woman—will face very difficult situations and is more doomed to fail than to succeed.

I believe that one ideal job for women in finance is that of financial advisors. A critical quality in that job is the ability to care for clients and listen to their needs and concerns, and women can excel in that. And, important in wealth management is not only wise investing but also the right amount of protection, against disability, death, and other risks. Coming back to my posts of a few weeks ago, there was much wisdom in the football players’ bringing their mothers to the New York Stock Exchange to discuss financial literacy. That memory still warms my heart.

Women have used cleverness and ingenuity when caring for others, achieving important results. My favorite example is Ethel Percy Andrus. A school principal who retired in the late 1940s to take care of her ailing mother, she was shocked to discover how many retired teachers had no health insurance. As there was no national health care program for people over age 65 (Medicare wasn’t created until 1965), Ethel turned to insurance companies to offer group health insurance to retired educators. She was turned down by more than a dozen companies but she persisted until one company agreed to develop a health plan for retired teachers. The plan became so popular that non-educators also wanted to purchase it. In 1958, Ethel established AARP (then known as the American Association of Retired Persons). The rest is, well, history.

Friday, June 3, 2011

A (very special) College Fund

If you watched the NBC Nightly News on Wednesday, June 1st, you heard the story of a boy, La’Shaun Armstrong, just 10 years old, who survived a very tragic accident in which his mother drove a van carrying him and his three siblings into the Hudson river. La’Shaun was able to escape via a car window and swim for help. Tragically, his mother and siblings were dead by the time help arrived. But if you watched that broadcast, you also heard that the Ray Lewis Foundation and United Athletes Foundation (UAF) recently organized a fund-raising event to provide La’Shaun with counseling and a college scholarship and how athletes involved with the foundation have rallied to support La’Shaun.

I am going to put on my economist’s hat to talk first about college funds. Over the past decade, tuition and fees at four-year public colleges and universities have increased more rapidly than they did during the 1980s or 1990s, rising by an average of nearly 5 percent each year (adjusted for inflation). With this trend unlikely to abate, an average American family with children can expect to dedicate a sizable share of their resources to paying college tuition. However, according to the FINRA Financial Capability Study, well below half—41 percent—of those who have financially dependent children have set money aside for college educations. And even those who have set money aside may not have done it in the most tax-savvy way. Only 33 percent of those who have set aside money for college educations have used a tax-advantaged savings account such as a 529 Plan or a Coverdell Education Savings Account.

But with the costs of college increasing so fast, planning for children’s education is critically important and may be the deciding factor in whether children will be able to go to the college of their choice or even to attend college at all. And with wages diverging so widely for workers with and without a college degree, not having that degree may mean a lifetime of low and stagnating wages. Building a college savings fund may be not only the best investment for the children’s future but also a way to inspire children to go to college. Of course, starting early is the key to build up savings: one dollar put aside today at an interest rate of 5 percent will more than double 15 years down the road. It is great that the foundations helping La’Shaun have thought about a college fund for him.

But let me now return to this story without my economist’s hat. As Albert Camus would say, life has its way of being tragic, and those frigid waters changed La’Shaun’s life instantly and dramatically. His is a story of incredible survival and resilience. Still, a kid of that age needs more than financial support. I had the opportunity to meet La’Shaun in New York at the recent event organized by the UAF. He is a shy kid with a tenderness in his eyes, and on meeting him, you can hardly resist giving him a hug. And a big hug he got from, well, a very big guy (you can see pictures of those strong hugs along with the full NBC story here: http://today.msnbc.msn.com/id/43236305/ns/today-today_people/t/boy-who-survived-hudson-crash-nfl-star-brother/ ). Ray Lewis and the UAF have committed not just to establishing a college fund but to being the mentors, the family, of this very special kid. In the words of La’Shaun, Ray Lewis is “like an older brother to me.” Reggie Howard, the president of UAF, has made La’Shaun part of the players’ families.

When asked what they aim to do for La’Shaun, Ray Lewis stated it succinctly. His hopes are “to achieve much more than what his situation offered.” There is early indication that what they are doing is working. When asked what he wants to do when he grows up, La’Shaun responded without hesitation: “I’m not sure yet.. First, I have to finish college.”

If you want to donate to this very special college fund, see the link below.

Monday, May 30, 2011

Ending Athletes' Bankruptcies

I’d like to dedicate another blog post to the issue of athletes and financial literacy. Around the time of my previous post on the topic, NPR featured a story about professional athletes and their financial literacy (the link is provided at the end of this post). The article mentions Kenny Anderson, who earned more than $60 million during his 14 years in the NBA, yet declared bankruptcy the year his career ended. The story goes on to talk about what happens when athletes acquire great wealth without having a clue about money management. Even in the NFL, which has the most college graduates, players often do not have any experience managing money, including what they might learn from paying for a college education, as they generally attend college on a scholarship.

I sent the NPR story to Reggie Howard, who is the President of the United Athletes Foundation and cares deeply about this topic. His reply came back with even more sobering information. He was just informed that 15 athletes in one city alone have been victimized by a single financial advisor. Each athlete gave the advisor’s agency control over their bill payments and money management and all got a bad deal. No one ever talked about it, which allowed the advisor to continue to use the same method on each player. Reggie was outraged and ended his message with the passionate tone he uses when he talks about victimized players: “This subject really gets my blood boiling. We have to change this.”

Stories like this one illustrate yet again the dire consequences of financial illiteracy. Unfortunately, professional athletes—newly wealthy, young, and inexperienced—are ideal targets for scams or unscrupulous advisors when instead good financial planning is the thing they need the most. Even for those making very sizeable incomes, there is no guarantee that the money will last a lifetime; athletes’ career paths are very unique (for example, they can be quite brief) and risky (a serious injury can put a quick end to a high income), and this requires even more skillful money management than normal. Sound planning is needed to make sure that money will extend well beyond the careers of players, that it is invested to grow over time, and that it is not squandered in unsustainable lifestyles or in risky investments that players do not understand or have experience with. And athletes need to know how to protect their wealth, including how to avoid bad advisors and unscrupulous agents and how to make good decisions when presented with well-intended requests or investment suggestions from friends.

We cannot expect all professional athletes to be experts in dealing with money. They become wealthy very early in life, before they have had a chance to gain any experience in dealing with financial matters. Their colleagues are mostly other athletes or sports professionals, so it is not possible to get much help from their peers. In my view, some money management has to become part of the standard, ongoing services that are offered to athletes. In the same way that it is standard for athletes to have coaches, doctors, and managers to help take care of their physical fitness, so it should be standard to have help in taking care of their financial fitness. And this help has to be specialized, designed to fit the needs of the very specific career that athletes face. Finance and financial decisions are too important, with potentially profound consequences for athletes' lives, to just be left for the athletes to figure out on their own.

Like Reggie, I detest the idea of athletes going bankrupt. It is not just the fact that it is unjust, unnecessary, and ugly as hell. It is also that we look up to and admire these people. Unlike them, we cannot bound up two flights of stairs without gasping for breath, we have back pain from sitting long hours at a desk, and we have boring jobs and screaming children. But when we see these athletes play, they make us dream. We believe they are special and we admire their skills and talents. This is why we get very upset when we find out that an athlete has, say, a gambling problem or beats up his spouse. In our eyes, they are better than we are, and they should do better than we do. And to young people, athletes are practically superheroes. Telling kids about athletes’ financial troubles would be like breaking the news that the Bat mobile has been repossessed. If athletes are in financial trouble, then, well, they are just like the rest of us. I’d like to see them be better equipped to make good financial moves; maybe if they can do so, the rest of us will follow.

Here is the link to the NPR story.


Wednesday, May 11, 2011

Financial literacy and football

I was recently invited to participate in a panel on financial literacy that was organized by the United Athletes Foundation (UAF) and the STAR EMBA program at the GW School of Business. It was held at the New York Stock Exchange, and it was good to go back to NYSE a second time. I had accepted the invitation without giving much thought to who would be in attendance at the event. A few days before the event (which was held April 29, 2011), I was given the list of the panel participants: Robert Marcham (moderator), Annamaria Lusardi, Ray Lewis, Rushia Brown, Chuck Lewis, Bill Imada, Sam and Char McNabb, and Gordon Brown. I had not heard of these financial literacy experts before and wondered whether they were academics as well (please, remember that I was born in Italy, so I do not know very much about American football or basketball). So, it was not until I arrived at NYSE that Friday that I discovered that Ray Lewis was THE Ray Lewis of the Baltimore Ravens, Sam and Char McNabb were the parents of THE Donovan McNabb, and Rushia Brown was THE Rushia Brown. There I was sitting on a podium to the right of superstar Ray Lewis, speaking to an audience of athletes and their families as well as the President of the UAL, Reggie Howard. Oh boy, I was in deep trouble!

I was the first on the panel to speak. I talked about the troubling state of financial literacy in the population, of the divide between those who know and those who do not know, of the sharp contrast between the complexity of financial markets and the very low level of financial knowledge that most people have. I spoke of the dire consequences of the lack of financial literacy; it is those who are less financially literate who pay more for financial services, who are more likely to engage in high cost mortgages and to default on them, and who are less likely to take advantage of the financial markets or to accumulate wealth. In the same way in which skills, practice, and experience help athletes to score and avoid faulty steps, financial literacy empowers people to take advantage of the opportunities offered by financial markets and to avoid scams or running into financial trouble. I also spoke of the difficulties that athletes may face in managing their finances and taking care of themselves, their families, and their communities both because of the peculiarity of their short careers, the increased complexity of financial markets that everybody is facing, and, of course, their fame.

Ray Lewis spoke next. He simply blew everyone away. He spoke of what financial literacy means to him, and the problems he has faced. He reflected on the grim statistics we had heard from the moderator that more than 70% of NFL players are bankrupt, unemployed, or divorced a few years after retiring. He talked about how many young athletes are ill informed about investing and managing their money and the problems that result. And he spoke of the need for athletes to be worry-free when on the field practicing or playing—absolutely nothing should distract from the focus on the game. He spoke with a passion and an intensity I have not seen in any person. I have a Ph.D. in economics and am myself passionate about financial literacy, but I could not have articulated the case for financial literacy the way Ray Lewis did.

Sam and Char McNabb spoke of the continuous worries that parents of athletes have about their children. From the anticipation of who will be drafted to the journey through the games, injuries, victories, and losses, they spoke of the desire to protect their son from making bad financial decisions, but the difficulty they face in knowing where to turn for advice. It was when Char McNabb spoke that I realized that about half of the audience were mothers of athletes. She asked them to raise their hands, and so many hands went up! I cannot begin to tell you how appealing it was to see that it is their mothers who the athletes brought to this event; it is them they turn to, whom they trust. I developed an instant affinity for these football players! And when the speaking was finished and I watched the mothers posing for a group photo, I could clearly see where the determination of these athletes comes from!

Sitting among these extraordinary people, I started to dream. What if these athletes became the champions for financial literacy? What if they spoke to students and told them how important it is to become financially literate. Students would listen to them; they look up to athletes. Imagine if we could organize a competition among schools, and the students who got a perfect score on a financial literacy test would get to spend an hour with, say, Ray Lewis or Reggie Howard, to listen to the stories of how they trained to win a game and why they care about financial literacy. Imagine if one of these players decided to become a spokesperson for financial literacy. Imagine…

As I hope I have conveyed, this was not my usual financial literacy conference, and not my typical audience. But it was a special day, and it illustrated how profound and widespread financial illiteracy is and how severe the problems associated with it are. And everybody can be affected by it, even the superstars we watch on TV. At the close of the panel, I got a warm handshake from Ray Lewis; he said he enjoyed my talk. It was . . . priceless!

You can look at some of the photoes of the event on our Facebook. Here is the link: http://www.facebook.com/media/set/?set=a.174503175936844.49893.119369231450239&saved

Thursday, April 21, 2011

The Workplace Financial Fitness Toolkit

On April 12, 2011, we launched the Workplace Financial Fitness Toolkit. With the support of the New York Stock Exchange (NYSE) Foundation, Punam Keller, from the Tuck School of Business, and I have designed a customized workplace financial fitness program using an innovative and practical approach based on well-established financial literacy and marketing principles. Every employer interested in starting a financial education program can use this toolkit.

Lack of financial literacy in the United States is well documented—the research tells us that most people lack basic financial knowledge and are not well equipped to deal with complex financial decisions. As a result, many individuals have difficulty making sound financial decisions. Remedying this problem is terribly complicated, one reason being that individuals have different needs, different preferences, and face different economic circumstances.

The workplace is an ideal venue to provide tools to facilitate financial decision-making. The goal in developing the toolkit is to provide a checklist of recommended financial fitness action items along with marketing materials to encourage employees to improve their financial fitness.

In essence we have developed two toolkits: an Employer Customization Toolkit and an Employee Customization Toolkit. The Employer Customization Toolkit contains (1) the Employer Checklist, (2) motivational information about the importance of every employer providing or facilitating 10 key steps to financial fitness, and (3) additional materials to help employers with implementation of the financial fitness recommendations. The recommendations are divided into three stages: basic, intermediate, and advanced. Employers who currently offer financial fitness assistance can use the Employee Customization Kit to motivate employees to participate in the financial fitness programs offered.

The Employee Customization Toolkit is designed to empower employees to improve their own financial fitness. The Employee Customization Toolkit contains (1) the Employee Checklist, (2) motivational information on the importance of every employee improving aspects of their financial fitness, and (3) implementation guidelines for each recommendation. Like the Employer Customization Toolkit, the employee toolkit allows individuals to customize or select the fitness recommendations that suit their needs.

Developing the program was a challenging task. But we very much benefitted from the guidance of Michelle Greene, the VP, Head of Corporate Responsibility, executive director of the NYSE Foundation and a champion of financial literacy. We also assembled a team of experts to help us in this work. We benefitted from the insights of academics like Robert Clark (North Carolina State University College of Management) and Eric Johnson (Columbia Business School), financial literacy leaders like Carrie Schwab-Pomeratz and Michael Townsend from the Schwab Foundation and Ted Beck from the National Endowment from Financial Education (Carrie and Ted also serve on President Obama’s Council on Financial Capability), Janet Parker from the Society for Human Resource Management (a former member of President Bush’s Council on Financial Literacy), and Jennifer Wayman from Olgivy PR Worldwide (one of the creators of the The Heart Truth, an award-winning national awareness campaign about women and heart disease with its signature Red Dress symbol).

On April 12, not only did we launch the program but we also rang the opening bell at NYSE, an experience I will never forget. And yes, we took a lot of pictures which are now posted on the FLC’s Facebook page. You can also watch a video of the opening bell ceremony (did I say it was memorable?).


We hope many companies will embrace the Workplace Financial Fitness Toolkit and customize it to meet their goals of assisting employees in the attainment of financial independence and security. The program can be found here:


Friday, April 1, 2011

Celebrating Financial Literacy Month

April has been declared Financial Literacy Month and we, at the Financial Literacy Center, celebrate it by meeting with our team members to present preliminary results from the 19 projects the teams are doing in year 2. The research teams are tailoring educational materials for people at various stages of their lives: young workers, mid-career workers, those approaching retirement, and retirees. They are also targeting underserved populations such as low-income, young, and disabled workers, all of whom are particularly vulnerable during periods of financial turbulence.

The second year activities cover a range of topics, including:
• How automatic enrollment in pension plans can improve savings
• How to increase the use of the government’s key tax-time savings policies, particularly the Saver’s Credit targeted to lower-income households
• How financial advisors help their clients decide when to claim Social Security benefits and whether this advice is based on client attributes
• How to develop an effective curricula to teach financial literacy to pre-service K-8 teachers and adult learners
• How to improve access to financial services for legal immigrants
• Whether additional disclosure would be valuable in helping people anticipate and plan for health care expenses in retirement
• Whether an intensive online “financial bootcamp” for women is effective in modifying behavior.

We held our meeting at Harvard Law School and I am grateful to Howell Jackson for hosting the workshop in the elegant rooms of HLS. But the New England weather did its April fool’s trick: rather than warm spring weather, we got several inches of snow today. (Note to self: move closer to the equator!)

You can read more about our projects at: http://www.rand.org/labor/centers/financial-literacy/projects.html
And you can see a picture of all of us on Facebook!

Monday, March 14, 2011

Financial fragility

I mentioned in my previous blog post the importance of having a buffer stock of savings. I would like to continue to discuss what individuals actually have or can rely on in case they are hit by a shock. This is part of a new research project, which is joint work with Peter Tufano of Harvard Business School and Daniel Schneider, a sociologist who is finishing his Ph.D. at Princeton University.

We engaged the market research firm TNS Global and collaborated with them to design a new survey that was fielded in June–September 2009. Specifically, we ask respondents: “How confident are you that you could come up with $2,000 if an unexpected need arose within the next month?” Respondents could reply:

• I am certain I could come up with the full $2,000
• I could probably come up with $2,000
• I could probably not come up with $2,000
• I am certain I could not come up with $2,000

Because we are dealing with an unexpected event in the future, it is important to ask about confidence rather than ask a yes or no question. The $2,000 figure reflects the order of magnitude of the cost of a major car repair, a large co-payment on a medical expense, legal expenses, or a home repair.

The news is not good: The capacity to cope with financial emergencies is very limited. Half of Americans report that they would probably or certainly be unable to cope with such an emergency. More specifically: 24.9% of respondents reported being certainly able to cope; 25.1% probably able to cope; 22.2% probably unable to cope; and 27.9% certainly unable to cope.

The capacity to cope with a financial emergency is not only generally limited but also varies significantly with the economic and demographic characteristics of individuals and their households. While those with higher income and greater educational attainment report greater capacity to cope, a large proportion of individuals with middle-class incomes report they are certainly not or probably not able to cope. Moreover, even among those with some higher education, more than half reply that they would be certainly or probably not able to cope. In other words, while inability to cope is severe among the less educated and low-income groups, it is not limited to the poor or to a small group of the population. Similarly, while financial fragility is more pronounced among the young, many older respondents, who are presumably close to retirement and at a point in life when their wealth accumulation should be at its peak, report anticipating difficulty in coping with a financial a shock. And women and families with children are less likely to be able to cope with shocks.

The financial crisis is a clear contributor to financial fragility, although not the only one. Those who suffered wealth losses, particularly large losses in excess of 30%, report greater inability to cope. This may explain why even some wealthy people anticipate potential inability to cope with a shock—likely due to lowered wealth in conjunction with high fixed costs and inflexible commitments The unemployed are also much more financially fragile, with just about one-third reporting they would certainly or probably be able to cope and 41.2% reporting they would certainly be unable to cope.

This is a worrisome finding as it shows that individuals and the economy are fragile to shocks. Many policies have so far focused on promoting asset building for the long run. It may be useful to start considering the short run as well.

I am presenting this work at the Brookings Institution this week, and I will keep discussing more findings and the potential implications of this work. Please send me your comments, too.

The Huffington Post featured this paper on their web and asked to share your story. Here is the link:

Thursday, February 24, 2011

Saving for a rainy day

This week, February 20-26, 2011, is America Saves Week and I would like to write about the importance of precautionary saving.

One of the most worrisome statistics from the 2009 FINRA Financial Capability Study is that, when asked whether they had said aside sufficient funds to cover expenses for three months in case of sickness, job loss, economic downturn or other emergency, 51% of respondents (in a sample representative of America) said they do not have such precautionary funds. The crisis may have depleted some of these funds, but not having a buffer stock of savings exposes both the individual and the economy not only to a large shock but also to a small shock, such as the car breaking down, the house needing a small repair, or a sudden out of pocket health cost. And with unemployment rates as high as 10%, the lack of precautionary saving makes people not just vulnerable but also hit hard by the loss of their job.

The expansion of the opportunities to borrow may give the idea that, if an emergency arises, one can turn to credit cards or find other ways to borrow. The problem is that, in a moment of need, borrowing at high interest rates is not only problematic, but can turn quickly into higher costs and fees if one were to miss a payment, go over the limit, or use the card as a cash advance. Turning to payday lenders or similar types of loans would only further increase the cost of borrowing. The problem with these methods is that they do not provide insurance at all. One wants an instrument, like saving, that can help in time of needs, not turn to an instrument that becomes pricey when most in need.

Because it deals with emergencies that happen unexpectedly, these funds are better be liquid. One does not want to sell possessions: a car, the home, or other such items when faced with a shock. Even selling stocks may come with a stiff cost if one has to sell when the market is down. As we have experienced in the past few years, having high unemployment when the stock market plunged only accentuates the pain of job loss.

This principle is perhaps so important that even Aesop illustrates it in a fable known as The Ant and the Grasshopper. The fable concerns a grasshopper that has spent the warm months singing while the ant worked to store up food for winter. Sure enough when the winter came, the grasshopper found himself in great difficulty. I would say there are not many cases when economics crosses path with literature, but it is great when it happens. As the story says perhaps better than any equation I would write, it is a good idea to store up a little bit for those winter rainy days.

If you want to look at the statistics about who has saving for a rainy day, here is the link to the state-by-state Financial Capability Study data: http://www.usfinancialcapability.org/

Friday, February 18, 2011

Some questions about financial literacy

A reporter from Germany contacted me recently to discuss financial literacy. Because we were not able to speak on the phone, she sent me her questions and asked that I write back to her. Since these are very general and important question, I thought I would also post them on my blog. Here they are:

1. How much do Americans know about finance? Do you have actual research results that show that there is a lot that needs to be improved?

For several years and in many published papers I have documented the lack of financial literacy among Americans. I would like to describe the most recent results, which I presented to the Financial Crisis Inquiry Commission last year and which are part of a new survey, the Financial Capability Study, by FINRA Investor Education Foundation in collaboration with the U.S. Treasury. According to that survey, less than half of Americans can correctly answer two simple questions about interest rates and inflation, and only 30% of Americans can correctly answer these two questions and a question about risk diversification. As I mentioned when I testified to the Commission (a link to my presentation and the full report on the findings of the Financial Capability Study are below), these levels of financial illiteracy are very worrisome.

Link to report prepared for the Financial Crisis Inquiry Commission:
link to the video presentation:

2. What do you regard as the main causes for a lack of financial literacy in America?

In America, as in other countries, changes in demographics (aging of the population and reduced fertility), increased mobility in labor markets (by the time workers turn 35, they have already held many jobs and they need to have portable pensions), and changes in financial markets have shifted the responsibility of financial well-being from the government and employers onto individuals. However, this has not been accompanied by changes in school curricula or workplace programs to equip people to deal with increased personal financial responsibility. In other words, it is not the case that financial knowledge is getting worse, simply that the world has changed and is still changing rapidly. The financial knowledge people are equipped with is inadequate to deal with the complexities of the current financial system and market structure.

3. What is it that makes financial literacy so important?

What makes financially literacy so important are the many changes we are experiencing in the following areas:
1) The pension system. Pensions have been shifting from defined benefit to defined contribution programs. As a result of this shift, workers are now in charge of deciding how much to save and how to allocate their pension wealth. Moreover, when they retire, they are in charge of decumulation of their pension wealth, and have to make decisions such as whether to annuitize or to take their pension as a lump sum: a very difficult decision with important consequences for financial well-being after retirement.
2) Financial markets. Consumers are confronted with much more complex financial instruments than ever before; consider, for example, adjustable rate mortgages or mutual funds that invest in foreign markets.
3) Opportunities to borrow. Opportunities to borrow have increased dramatically in recent years. One of the features of credit cards and sub-prime mortgages is that decisions about how much to borrow are entirely in the hands of borrowers. One can borrow a very large amount on credit cards simply by using more and more cards. Similarly, with sub-prime mortgages banks were leaving the decision of how much to borrow in the hands of the borrowers. In these situations, it is important that the borrower is financially literate and can understand key concepts such as interest compounding.

4. What are the difficulties when you want to improve the financial literacy of the American citizens?

Improving financial literacy requires a consistent set of programs aimed at different groups of the population. We cannot necessarily bring adults into the classroom, but we can and should provide financial literacy in schools to prepare young people for the new world they are facing. Most adults would fare better with programs at work (this is where workers are and where they often have to make financial decisions). It is difficult to coordinate all of these efforts and engage the various institutions that should be part of a consistent strategy to improve financial literacy, from the Department of Education to the U.S. Treasury to the regulators to the business community. Moreover, education and programs require resources. Education is going to deliver results in the long run, yet very few politicians or institutions have a long-run horizon.

As an aside, when presenting my research and work on financial literacy and financial education, I used to receive objections from people who insisted that financial education is too expensive. I think that the financial crisis has shown us that it is too expensive NOT to do financial education.

5. Do you think that politicians give enough attention and efforts to this issue?

Some politicians do, and they need to be praised for that. I travel a lot and give talks in many countries, and I think that several countries have become aware that they need to address the problem of financial illiteracy, as they will end up paying for it one way or another. For example, lack of financial literacy can mean costlier welfare benefits for some groups, and some countries understand that prevention is cheaper than the massive costs incurred when crises erupt.

6. With great interest I have read your current blog entry about two new videogames called "Bite Club" and "Farm Blitz", which were developed by Doorways to Dreams Fund. How do you promote these videogames in order to make sure that many people play these games and gain knowledge? Do you know anything about the success of the former games Groove Nation and Celebrity Calamity?

These games were targeted to a specific subgroup of the U.S. population. As a result, they will be distributed at places such as Walmart stores. Of course, we can’t force anyone to play, so the game creators have used social marketing techniques to encourage play and have made sure the game is as fun and engaging as other popular online games. We have submitted proposals to formally and rigorously evaluate the effectiveness of these games, and we will know soon how effective they are. So far, we have done a qualitative evaluation via focus groups and in-depth interviews. It is very important to know what works and what does not work in financial education. This why the projects we do at the Financial Literacy Center always have an evaluation component built into them. Please look at the projects we have completed in year one and the new projects we are doing in year two:

Tuesday, February 15, 2011

Annie Sullivan of personal finance

Beth Kobliner wrote in her most recent blog post that I am the Annie Sullivan of personal finance. I have received praise for my work, but this is the best I’ve ever gotten. I must say that the association with Anne Sullivan almost made me cry (yes, you students who took my classes, I do have a heart). It is very humbling and is also giving me energy to do more.

I am deeply honored and gratified by Beth Kobliner’s praise, but I want to point out that she is doing some truly excellent work to benefit young people. While I write a blog—not as often as I would like—and do research work on financial literacy, Beth Kobliner has written a best-selling book geared to helping young adults make good financial decisions and has been very active in youth financial education. In recognition of her important work, President Obama nominated her to the President’s Advisory Council on Financial Capability. The Council has held their first meeting this year, and Beth is already very active in its Youth Education Subcommittee.

Every day we have a chance to make a small difference in improving financial literacy. Someone said, “People seldom see the halting and painful steps by which the most insignificant success is achieved.” That someone was Anne Sullivan.

Here is a link to Beth Kobliner’s blog:

Monday, January 10, 2011

A Smiling Horse

I have mentioned some of the activities of the Financial Literacy Center (FLC) in previous posts and I want to discuss them further here. We place a high value on creativity and ingenuity in the design of financial literacy programs and have found that this is particularly important when trying to reach certain segments of the population such as the young and those not in school and not in the workplace.

One needs to think outside the box to find effective solutions to financial illiteracy. One of our teams has certainly gone in that direction. Doorways to Dreams Fund (D2D) has been developing video games targeted to low-income individuals to provide training in critical financial literacy areas, including household budgeting, consumer decision making, and cost-effective use of financial service providers.

The team has already launched Celebrity Calamity (http://www.d2dfund.org/first_game), a game targeted to lower-income women aged 18-30, especially single mothers. Players become the financial manager for up-and-coming celebrities who spend beyond their means. To be successful, players must effectively use a bank account, debit card, and credit card, so the game teaches the importance of paying off credit card balances, minimizing credit card finance charges, avoiding fees (including bank overdrafts, late payments, and over-the-limit fees), and making informed annual percentage rate choices. The game also includes a number of implicit learning objectives, such as raising awareness of spending behavior and the value and utility of saving money.

The game that the FLC supported and that D2D is now completing is called Bite Club. Designed for lower-income adults, this game is inspired by the very popular casual video game Diner Dash. Bite Club 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. For low-income and minority adults, building retirement savings may seem completely out of reach, given pressing needs to pay down debt and manage daily expenses. Bite Club players experience the natural tension that exists among debt service, spending, and long-term saving as the game unfolds.

I want to explain the workings of the game to show you what I mean when I say we need to think outside the box! To win, players must successfully manage a “day club” for vampires. By featuring vampires, who live forever, the game is able to highlight the impact of long-term savings. Bite Club is a 15-round game with three years’ time passing between each round, allowing the game play experience to span 45 years. In effect, the players enter a financial simulation running from age 22 to age 67.

The core challenges of the game include the following:

• Running a club for vampires that offers patrons seating areas with tables and couches, a bar (type A, B, or O blood!), a DJ booth with interactive song selections, and a dance floor.
• Servicing the four stations of the club in order to satisfy a variety of vampire customers and earn revenue.
• Making financial management decisions related to paying off debt, managing current consumption, and saving for retirement.
• Reacting to a variety of savings offers, which include retirement “open enrollment” and additional long-term savings promotions.

The core instructional design content includes

• Saving for Retirement. Players’ characters long to move to the “No Sun-belt” for retirement, but because vampires are immortal, they must save a substantial amount of money to finance their retirement dream, and they must reach this retirement savings goal before they can close down their “day club” and retire.
• Paying Down Debt. Players start with credit card debt (from purchases of items needed to open the club) from the Werewolf Bank. And in order to retire, players must pay off low annual percentage rate student loans from their university business classes.
• Managing Current Consumption. The club must be managed effectively to continue to satisfy customers. Players are offered the option to purchase various upgrades, some of which are valuable (needs) and some of which are merely aesthetic (wants).

Why this approach to improving financial literacy? As many as 72% of Americans play video games, with rates of play highest among those under age 35. Moreover, video games are the fastest growing form of entertainment in the United States. We need to find ways to engage individuals in financial education. Learning through traditional venues like classrooms and the workplace are not feasible or desirable for all populations.

Thinking outside the box requires creativity and ingenuity. Nick (Maynard), Tim (Flacke), Peter Tufano, and others at D2D have been willing to experiment with new ways to improve financial literacy. They have been willing to think differently and consider unique approaches. Often it seems this kind of thinking requires the creative mind of a child not yet locked into traditional ways of thinking. I was in Boston Common last summer and saw a group of people around a guard riding a tall, beautiful horse. I joined them to admire the horse. Everyone in the group had comments on the horse, very similar to what I was thinking too, until a little girl looked up and asked, “Does this horse smile?” Now, who would have thought of that?