Thursday, October 4, 2012

Financial Literacy or Financial Capability?

There has been a lot of debate about the definition of financial literacy and whether policy and research should focus on financial literacy or on financial capability. Many institutions have opted for the latter arguing it is more encompassing and we should focus on behavior. I am going to argue in favor of financial literacy, for three main reasons.

First, nobody knows what financial capability really means. What are the set of behaviors that make a person financially capable? Is it that a person save? Well, there are times in the life cycle when we should borrow rather than save. Is it that a person is always paying credit cards in full? There are times when liquidity constraints are tight and borrowing on credit cards is appropriate. Is it that a person has a bank account? A bank account may be not practical if the bank is 50 miles away (think rural areas) and one cannot maintain a large enough balance to avoid paying a monthly fee. I could go on and on. The point I want to make here is that what is “good” behavior or, as we economists like to call it, “optimal” behavior, depends on a lot of factors, making it very hard to come up with a set of behavioral guidelines that are applicable to everyone. Moreover and most importantly, behavior depends on preferences in addition to economic circumstances, and this makes it very hard to judge what “good” behavior is and to recommend what people “should” do. For example, I should not invest in education if my passion is to tinker with tech devices in my garage, particularly if those devices one day become known as Macintosh computers. When policy tries to dictate behaviors, the risk of becoming paternalistic is very high. And mistakes have resulted from the trumpeting of “good behavior,” for example, the recommendation that everyone should own a house. (We saw what a good idea that was!)

The financial literacy approach recognizes that it is the individual who is in charge of making decisions and is the one we are putting at the center of the attention. It also recognizes that people are different and that one size is very unlikely to fit all, contrary to many recommendations that advocate for what we all “should” do. Empowering people may be a modest step, but even ice cream comes in many flavors (Italian gelato even more and very good too!), so it is not clear why we should have a single-flavor recommendation. We can choose according to our tastes.

Second, knowledge is power. Rather than focusing on behavior (whose optimality is in the eye of the beholder), financial literacy makes us focus on the inputs that shape behavior. One of those inputs is knowledge. We require and want knowledge in almost every field I can think of that requires some judgment, from driving a car to working in a factory to extracting a tooth (try that on my niece Giorgia and you will get a lesson!). The world has changed and we require new skills to be able to succeed in today’s society. I love the definition that the Programme for International Student Assessment (PISA) has used to measure students’ knowledge: “Are students well prepared for future challenges? Can they analyze, reason and communicate effectively? Do they have the capacity to continue learning throughout life? The OECD PISA answers these questions and more, through its surveys of 15-year-olds in the principal industrialized countries. Every three years, it assesses how well students near the end of compulsory education have acquired some of the knowledge and skills essential for full participation in society.” This is not a definition of financial literacy, but it could well be as it articulates what people need today to “participate in society.” Also, note that we are able to articulate what a financially literate person should know. As I have mentioned in a previous post, we have just finished writing a set of national standards, which will be soon be available from the Council for Economic Education.

Third, simply stated, the reason I favor financial literacy is because it is easy to understand, we know what we are talking about, and it is the term that successful organizations have used in describing their programs. One of the most successful countries with regards to financial literacy, i.e., New Zealand, has the “Commission for Financial Literacy and Retirement Income.” The OECD as well, which has been a pioneer in this field, is all about financial literacy and financial education programs.

Let me close by saying that we need to be humble when it comes to guiding individuals via policy and information. We need to respect people’s unique characteristics and their differences, but we must have the audacity to aim high, believe that we can empower people to make good decisions. In my view, this is what financial literacy is all about.

Monday, September 24, 2012

A national standard for financial literacy

I spent a lot of time on a beach in Italy in August building sand castles with my niece Giorgia. It was not an easy operation and required a lot of time and patience, particularly in my case, given that as I finished one part of a castle and started building another, the first part would collapse. But since it takes so much time and patience to build a sand castle, I had a lot of time to reflect on things that had been on my mind.

I thought a lot about the ideal content for a course in financial literacy. I had recently finished teaching just such a course (see my previous blog post), but it was a crash course with only four 3-hour classes. While it’s possible to pack a lot into those hours, a full-length course would provide much more time. What else could be added to such a course? What are the financial literacy topics we “must” teach?

When I started designing my short course, I searched for syllabi on the web. In browsing materials, including what is covered in high school classes, I was struck by how much material is out there and how many different courses there are and the variety of topics these courses cover. I also looked at books on personal finance (and it is a jungle out there—everybody, including people who have gone bankrupt, wants to tell their story and teach you how to be financially savvy). Some of the material I found seemed very good, some covered topics I thought would better be in a history course (for example, how to balance a checkbook), and some material was offered in the way you’d teach basic cooking or household plumbing—a lot of how-to’s that are supposed to make people smart.

I was also struck by how much courses differed, even though they were all supposed to cover financial literacy. Part of this is a reflection of the fact that we do not yet have a definition of what financial literacy is. This is a topic I will come back to in future posts, but differences in curricula across schools and states reflect the lack of a national standard on financial literacy.

I am, thus, very happy to report that the Council for Economic Education (CEE) has put together a team of experts to address this gap in the national standards. As I have mentioned in previous posts, financial literacy is no different in Vermont than it is in California, and it is not clear why we have so many different curricula in different states. A group of experts coordinated by the CEE will work together to create a single National Standard for Personal Finance. I am delighted to have been asked to participate in that work and very happy that many of the stakeholders involved with financial education are part of the teams of experts—not just academics but also high school teachers, representatives of not for profit institutions working to promote financial literacy, and so on.

My contribution to this initiative is twofold. First, I want to make sure that the financial literacy topics that are covered are rigorous and that we help students be decision makers. We need to give them tools to understand a world that continues to change. And we need to stay away from teaching rules, such as “you should save 3% of your salary”; teaching rules is not teaching, it is preaching. I also want to make sure we can use and incorporate some of the work done by the group of financial literacy experts in the Programme of International Student Assessment (PISA), which had the ambitious task of measuring financial literacy of high school age students across countries. The world is global and our students have to conform to standards not just in the United States but across the world.

This is the thinking I was doing while developing my sand castle building skills. And while I was admiring my finished work one afternoon, smiling with satisfaction, Giorgia—the little rascal—looked at my many hours of work and declared that my caste looked like “un gigante zoppo.” ( For those of you who don’t speak Italian, she said my sand castle looked like “a lame giant.”)

So, here are my three reflections:

1) Having national standards for personal finance will simplify the work of educators and help ensure the teaching of common concepts so that financial literacy is covered in a similar way across states and countries.

2) A unified national standard will likely result in the teaching of more rigorous concepts than we currently see in existing courses.

3) Never put a five-year-old on a team of judges at a sand castle building contest.

Wednesday, September 5, 2012

A new course in financial literacy

I was asked to teach a quick course to our new batch of Global MBA (GMBA) students. The idea was to refresh their math and economics skills, and thus it was named “Jumpstart.” I resisted doing it with all my strength. The course was scheduled for the first week of August and I had my sandcastle-building supplies together and was ready to head to the Italian beaches. But the faculty dean knows my weaknesses and told me I could use the course to teach financial literacy. So, I put aside my swim suit and sun block and started designing and preparing for this short course (in case you were wondering why I have not been writing my blog. . . ).

As you can imagine, the challenge was what to teach to students who come from all over the world and who have different backgrounds, in particular now that our dean is set to admit only students who want to change the world. (I am not kidding, and he says this when he meets the students; it is impossible not to like him.) But I discovered that this is an ideal group to teach financial literacy to; after all, this is a topic based on rigorous and universal concepts (interest compounding is the same in the US as it is in China), and I do not have to hold back the math.

The course was structured in four classes of three hours each. In case you think this allows for little time, let me assure you that there is a lot you can teach in three hours; the difficult part was choosing what is most important. I structured the course to cover the following topics: 1) understanding interest compounding and the time value of money; 2) understanding probabilities and risk; 3) essential macro concepts; 4) applications to personal finance and macro problems.

I have had many discussions at conferences with people who assert that one cannot teach (and people cannot learn) interest compounding. I cannot disagree more. This is a fundamental concept and is at the basis of every financial decision. If there was one thing, and one thing only, that I could teach in a course, this is what I would choose. It is only by appreciating the power of interest compounding that one learns the importance of starting to save early in life or of being careful when borrowing, given that interest rates charged on borrowing are often much higher than interest rates earned on assets. Most importantly, because our financial resources are spread over time, we need to be able to understand that a dollar tomorrow is worth less than a dollar today, and how much less depends on whether the interest rate is high or low. We cannot sum values due at different points in time (for example, our earnings each year); we need to discount future values to the present, and we do so simply by applying the formula of interest compounding. Because financial decisions are essentially about shifting resources over time, we need to have a basic understanding of interest compounding.

As an aside, I would like to remind those who think that people cannot understand or learn interest compounding that we let students take up large loans to pay for their education and that we have put people in charge of saving for their retirement. It is scary to think that people can and do make these sorts of decisions without understanding interest compounding; if we do not teach them, we all are going to pay for it. I told this to the GMBA students, too, since they are charged with the small task of changing the world. Giving people an understanding of this concept seems to bring results. I will not know what my students end up doing with this knowledge yet, but according to a recent paper describing a field experiment in China, teaching people living in rural areas about interest compounding increased their pension contributions by 40% . How about that! (The link to the paper is at the end of this post).

Teaching the concept of risk was the most difficult part of the course. In the many surveys I have conducted to assess financial literacy across countries, questions covering the concept of risk always get the smallest percentage of correct answers. This is why I covered this topic in the second rather than the first class and why I provided many examples—some of which involved dealing with pirates, just to remind students that finance has a wide range of applications. Like interest compounding, risk is an essential concept; most financial decisions have to do with the future, but the future is uncertain. Thus, we need to reason in probabilistic ways. For example my income next year may be, say, $50,000, but I also face a probability (about 8%) that I will be unemployed; and, while the interest rate on my bond is set at 5% for next year, there is also a chance that the issuer will default (yep, and these issuers can be governments…). It is critically important not only to grasp the concept of risk but also to know how to deal with it. While we all face risk, there are ways we can reduce it and minimize its impact. In fact, an important component of personal finance is not only to grow assets (using the power of interest compounding) but also to protect those assets (using the concept of risk diversification). One of the applications the students most enjoyed were the lotteries; they may be fun, but if you plan to become rich by winning the lottery, you are in dire need of taking this course!

And speaking of the future, one thing that changes over time is prices, for example, the prices of the goods we normally buy (this is what the Consumer Price Index, or CPI, measures). This is a bummer, because it means that if our money does not grow, our dollar today will buy less tomorrow. In other words, to make financial decisions we need to understand inflation and what inflation does to our purchasing power. This is why in the third lecture I turned to macroeconomics, and we studied inflation and the difference between nominal and real interest rates. It was also a lecture designed to teach the critical role of central banks and why we need these institutions in the economy. I hope my students have a better understanding now of the Herculean job that Chairman Bernanke and President Draghi have at the helms of the US Federal Reserve and the European Central Bank, respectively. Given that, by this time, students knew about interest compounding, we also covered economic growth (it is the same formula!) and calculated when China’s economy is expected to surpass that of the US. Write me a note if you, too, want to know this.

In the final class, we covered many applications that were also sprinkled through the other lectures. Armed with the knowledge of the fundamental concepts we had covered, there were almost no decisions we could not attack! For example, we calculated the return on the investment in an MBA degree and whether (and when) it makes sense to leave your job, pack your suitcases, and head to school again. We looked at methods of payment and when it is advantageous to lease versus pay cash and the implicit interest rates in a stream of payments required, for example, when paying back a loan. We calculated the gain from exploiting employers’ retirement saving matches and the return on contributions to Social Security under different longevity scenarios. Most importantly, we calculated what it takes to become a millionaire and discovered it is not overly complicated (again, you need to take this course if you want to know).

There were several rewards in teaching this course. First, I could finally pack my bags and head to the beach in mid August, when the sun in Italy was still burning. Second, I felt like I was making a difference—as my dean would say— if not in people’s lives, at least in their financial decisions. One student sent me a thank you note at the end of the course that was very touching and inspiring. So inspiring, in fact, that I plan to keep it in my desk drawer and read it whenever I return from conferences that discuss the futility of teaching interest compounding and the ineffectiveness of financial literacy.

For more information, see Changcheng Song (2012), "Financial illiteracy and pension contributions: A field experiment on compound interest in China."

Friday, July 13, 2012

The Power of Ideas

I was invited to attend the second meeting of CGI (Clinton Global Initiative) America, held in Chicago in June. I was part of the new Financial Inclusion working group that was added to the meeting this year. For those who are not familiar with CGI, it was established by former president Bill Clinton in 2011 to address economic recovery in the United States. As their web page states, “CGI America brings together leaders in business, government, and civil society to generate and implement Commitments to Action that create jobs, stimulate economic growth, foster innovation, and support workforce development in the United States.” I witnessed the importance of three principles at the meeting: (1) the power of ideas; (2) the power of translating ideas into action; and (3) the power of leadership.

The power of ideas. While the meeting had some short presentations and discussion leadership, a large amount of time was dedicated to brainstorming and generating ideas. The group at my table was a very heterogeneous bunch in terms of age, sectors of activity, and reasons for attendance. I ended up sitting near a very young man who I assumed was a college student (though he looked more like a high school student). Through my clumsy attempts to make conversation, I learned that he was 21, had finished college already, and was the founder and CEO of an education firm. It was then that I realized I might well be the dumbest person in the room. Once the discussion started flowing, it zigzagged around for hours, but several strong ideas came together and the moderator articulated them so well at the end of the discussion that it was as if many pieces of a puzzle had come together. It is, of course, part of my daily job to generate ideas, but it was particularly powerful to sit down with a group of people who have just met and are mostly non-academics and ponder and discuss ideas.

The power of translating ideas into action. As every entrepreneur knows, ideas are not worth much if they are not translated into action. A good part of the meeting was devoted to the creation of “commitments to action.” Some of these commitments originated at the meeting itself. Others had originated earlier but were announced and pledged at the meeting. Still others are in the making, as meeting attendees are now connected, and the organizers have found ways to keep participants involved in the discussions post-meeting. We heard success stories at the meeting—how some CGI groups, small and large, have been able to address specific problems. I was again struck by the many differences among the individuals—and the institutions and businesses they represented—who came on stage to speak about what they did. We had city mayors, government officials, journalists, CEOs, entrepreneurs, and young people (like the one who sat next to me) who described how they would commit to specific projects. And, as one can read from the report linked at the end of this page, from these commitments, new jobs were created and people gained access to training, to capital, and to financial services.

The power of leadership. What was most remarkable at the meeting was to see the former president reflect on the state of the economy; listen attentively to the guests he had on stage; and shake hands, hug, and thank the people who made commitments. I was impressed by his focus on education: the hard questions he asked about it and the people he brought on stage to discuss it. Neil Tyson, the charismatic director of the Hayden Planetarium at the Museum of National History, shouted: “When was the last time we longed? I have to go back to the 1960s.… The moon was in reach and we were headed there. That compelled everybody to dream about tomorrow.” So many dreams seem out of reach today, but for those of us sitting in the audience, there was comfort in watching a former president reflect on the state of the economy, and showing such concern for it. We could see, in one room, the power of leadership in action and the capacity to motivate, inspire, and bring people together to generate ideas and commit them to action.

Monday, June 18, 2012

Another star athlete, another bankruptcy

As the article linked at the end of this blog describes, another retired star athlete has filed for bankruptcy. In a previous post, I mentioned the statistics describing the number of football players who are bankrupt, unemployed, or divorced two years after retiring from their professional athletic career. Any time I read a new story, it’s a reminder of how ugly this statistics is. This athlete happens to have been a player on one of my favorite teams—not really important for my point—but it is a team close to home.

There are some commonalities among athletes declaring bankruptcy: significant investments in real estate—from expensive homes to ventures such as theme parks and resort projects, some of which are in court from the beginning—as well as investments in businesses and entrepreneurial projects that go bust. One may argue that this can be an outcome of anyone who engages in entrepreneurial activities—athlete or not. Moreover, as we are well aware, real estate is not an asset that has delivered high returns in the past few years. So, like many other investors, those who were betting on real estate went bust; so join the club.

But, as I tell my STAR EMBA students, a savvy investor needs to diversify risk. And what is wrong with some plain vanilla index mutual funds? One can live comfortably off the investment returns of a basket of boring stocks (and once the earnings total more than 35 million, one can weather declines in the stock market), which have the added benefit of not causing the investor to be dragged in front of a bankruptcy judge. How about entrepreneurial skills? We all aspire to be the next Steve Jobs, but the reality is that businesses have a high failure rate. When we run our own firm—in which we have invested our own money—we face a double risk as our human capital and our monetary capital is tied up in one asset. So, yours better be a good entrepreneurial idea—an iPhone, for example. As the saying goes, “to end with a small fortune, you have to start with a big one.”

It is also true that, if you give a very large sum of money to a young and inexperienced person, athlete or not, chances are the money is not going to be invested in the savviest way. And relying on investment advise from a financial advisor is not necessarily the solution. There is story after story of athletes being taken for a ride by unscrupulous advisors. As I have often argued, and as some new research shows, financial advice is not a substitute for financial literacy. In fact, it is a complement; those who have financial skills are better able to choose the right advisors and to ask the questions that ensure the advisor meets their needs.

I am firmly convinced that athletes have all it takes to be successful in finance. Financial success requires discipline, and who could argue that football players, for example, do not have discipline? Financial success requires perseverance and we know athletes train for long, grueling hours each day. Financial success requires the ability to stay calm in the middle of the storm, and anybody who has watched a quarterback knows what this looks like. Financial success requires knowing the rules of the game, and athletes understand that better than anyone else. What bothers me about this statistics about athletes going bankrupt is that it is preventable. If someone can show up every day for practice, this is all I need to turn him into a successful saver and investor.,0,911896.story?page=3

Sunday, May 27, 2012

BIG IDEAS: A museum for financial education

As I mentioned in one of my previous posts, I had many wishes for financial literacy this year. One came true last Thursday, May 24. A new Museum of Saving opened in Turin, Italy, with the objective to be a vehicle for financial education. As one of the academic advisors to the museum, I went to the inauguration and watched the ribbon cut by the mayor of Turin, toured the museum with the Welfare Minister, Elsa Fornero—a very strong supporter of financial education who has added financial education to Italy’s pension reform law—and gave a brief talk about the importance of financial education to the museum’s inauguration day attendees.

This is a big idea for financial education and a fantastic one. It is the brainchild of Andrea Beltratti, a professor of finance at Bocconi University in Milan and President of Intesa Sanpaolo, the bank that supported the initiative, and of Giovanna Paladino, who put the idea into action. Many Italians and tourists visit Italian museums every day to appreciate and learn about art throughout centuries of history. Now they can do the same to learn about economics and the workings of money and finance throughout the centuries, starting from the advent of money (estimated at VII century BC) and continuing to the collapse of Lehman Brothers (you could say we take a long run view in Italy). And they can do so in a very engaging way. The mascots of the museum are two little ants: For and Mika (combine the two words and you get “formika,” a slight modification of the Italian word for ant, “formica;” and since they are little, they are called the “formichine”) who guide visitors through the five rooms of the museum. As in the Aesop’s fable, they describe the importance of saving.

Each of the rooms has a designation, the first one is to “know,” the second to “learn,” the third to “tell,” the fourth to “dream” and the fifth to “experiment” the economic world. In the first room, the “formichine” describe the birth of money and trade from the beginning of time until today, and many topics can be pursued further by watching videos in elegant cubicles in the center of the room or by watching a movie in the multi-media room. At the end of the first room, there is a space for children to play financial literacy video games. In the second room, one can listen to a description of financial instruments and how they work; what is a stock, a bond, a derivative, and so on. They are described in a simple way by picking cards listing the topics and listening to their descriptions. In the “tell” room, one meets (virtually) Dante, Moliere, Shakespeare, and Hemingway. They describe the relationship with money during their lifetime and, in so doing, describe the economy in different time periods. And it is time to dream in the fourth room, where sixty-three monitors project snippets of famous movies covering saving and, in six of them, the role of money in society. The last room features an enormous dream ring on the ceiling with comments about financial instruments and the economy that are taken from economic studies (One of my papers is featured, and I admit, I am very, very proud of it). In that room, there is a possibility to experiment by playing games and simulation. One game is called Risky City, a Monopoly-type game in which one has to buy real estate (a risky game, in case people haven’t noticed yet). But my favorite is the This Is My Life game. It basically describes the actions that one has to take to realize a dream. The player chooses a dream and the game shows how, by saving, you can reach this dream. (My dream is to go back to Turin to see this museum again!) It is an important and powerful lesson: saving allows you to achieve your dreams.

When you enter the museum, in addition to many books dedicated to saving and economic topics, you can take a test to measure financial literacy. And yes, the questions are those used in the US Health and Retirement Study and now in the National Financial Capability Study, and one can take the test again when exiting the building (and researchers can figure out whether there are changes in the responses in the population, on average). The test also asks its takers to assess their own level of financial knowledge, and the hope is that witnessing the evolution of money, finance, and the economy over twenty-seven centuries of history can instill some humility as well as the desire to learn more.

Throughout the museum, you can hear interviews with experts and economists. At the moment, most of them are Italian (but more are to come) and feature Mario Draghi, the President of the European Central Bank; Ignazio Visco, the Governor of the Italian Central Bank; and also academics who have studied money, finance, and financial literacy. (I am not going to tell you whether I am interviewed; you have to go and visit the museum…). On the walls, you can read the phrases of famous writers and investors (including Warren Buffett) about saving, investing, and the economy.

As academic advisors, we had to think of how to assess the effects of the museum and we have designed several ways in which to do so. I did my first qualitative test on my little niece Giorgia. I took her on my lap and showed her the museum on my computer. Looking at the picture of the mascot, she smiled with joy and said, “I like this little kid, we have the same shoes. I am going to do some drawings now.” She saw a kid in the formichina right away, while I saw the shoes only after five iterations (you cannot beat the creativity of a five-year-old). Judging from the pile of drawings accumulating quickly on my desk, I am pretty confident this museum and the formichine are going to be a huge success! You can see them online at

Tuesday, May 15, 2012

Health and financial literacy

I spent a good part of the last month at a hospital bedside in Italy. It was a hard time, but it taught me several valuable lessons, including the similarities and differences between health and financial literacy.

On the surface, there are striking similarities between decisions about health and decisions about finance. Both affect important aspects of our life and both have consequences. Both require collecting information, evaluating alternatives, and taking some risk. But while financial decisions and health decisions are both difficult, it seems health has received a lot more of our attention. For example, there is normally a greater sense of urgency around health-related issues. This may be because the effects of being ill are visible, often painful, and easy to identify with. But the financial crisis has had some very visible and painful effects too, so there is no reason that we shouldn't give the same level of urgency to our financial well-being.

In health as in finance, one party knows more than the other (the doctor versus the patient, the financial advisor versus the investor) and navigating this relationship requires some care. In both cases (health and finance), it is critically important to ask questions, to discuss objectives in detail, and to exercise a good deal of caution. Again, health seems to be doing much better: doctors have been relatively successful in being recognized as experts that the public can rely on, while the “doctors” of finance are hardly seen as such; reliable financial experts are considered a rare species. Yet, it is not obvious to me that the statistics support this perception; there are financial advisors who have led clients into disastrous trades but also doctors who have operated on the wrong leg or failed to notice (as in the case of my father) deep skin lacerations on a bedridden patient (something that is undoubtedly included in any Health 101 course).

There are dangers of focusing on a single aspect of one’s health or one’s finances. Tending to retirement savings without dealing first with high credit card debt is perhaps analogous to treating high blood pressure while ignoring a lung tumor. Clearly, we want to be fully healthy, financially and physically—we cannot get by with just a healthy left arm or a well-managed checking account. But while most of us are willing to undergo regular health check-ups (and, if you ask me, some of them are pretty intrusive), many people never went for a financial check-up. We seem willing to swallow bitter medicine and undergo invasive procedures such as surgery, which some research tells us might be unnecessary or overused, but we are reluctant to follow the recommendations of financial advisors.

Health issues have also been able to engage celebrities to further their cause. At the entrance of the hospital in Italy, there was a large poster of Pippo Inzaghi, a professional soccer player from A.C. Milan (Pippo is the nickname for Filippo, but in Piacenza, where he was born, we call him Super Pippo). The poster says “Help us to win against cancer.” I really wish we had a Super Pippo for financial illiteracy.

Wednesday, April 4, 2012

An extraordinary week

How extraordinary last week was! On Tuesday and Thursday, I sat in a classroom on the sixth floor of Duques Hall, here at the George Washington University School of Business, to listen to Fed Chairman Ben Bernanke explain the recent financial crisis, the Fed’s response to it, and the lessons we can take from it.

While there were only 30 (very attentive and somewhat anxious) undergraduate students in the classroom and a handful of professors whose lectures in this course will follow Chairman Bernanke’s four initial classes (no pressure …), the classes were live streamed and are now archived online at

This was the first time that the Chairman of the Fed has given a set of lectures on the Fed, why it was founded, what its functions are, what it has done historically, and what it did during the financial crisis. This is truly extraordinary and part of the new era of Chairman Bernanke’s leadership, which is bringing transparency and accountability to an institution that has inspired books with titles like “Secrets of the Temple: How the Federal Reserve Runs the Country.” But what was more extraordinary was to listen to the leader of this institution, who more than anyone has done so much to turn the economy away from the brink of collapse, speak with such rigor, depth, and also humility. As he stated in his classes, because of what we do not know, we have to be humble.

I recognized in Chairman Bernanke the brilliant professor from Princeton, who finished his slide presentations right at the minute he was supposed to end, whose historical perspective was so deep and impressive that the students gave him, at the end of his set of lectures, a framed page of the 1933 issue of the New York Times as a gift. The front page of that issue announced that the United States was abandoning the gold exchange standard, a topic Chairman Bernanke covered in class in fascinating detail. But he also brought to the classroom the mastery (and agony) of leading a very powerful institution at a time when problems are not only domestic but also global.

And what a difference it made to be able to see him reflect on the lecture notes that were projected on the screen, walk around the classroom, call the students by name, and stay a few minutes overtime to answer questions. At the end of his last lecture he took a group photo with both the students and the faculty. It was extraordinary!

As if this wasn’t enough for one week, on Friday I got to go to the Clinton Global Initiative University here at the Smith Center to listen to former President Clinton speak. He launched the Clinton Global Initiative University (CGI U) in 2007 to engage the next generation of leaders on college campuses around the world. As described on their website, each year, CGI U hosts a meeting at which students, national youth organizations, topic experts, and celebrities discuss solutions to pressing global issues.

As many as 1,200 attendees came to GW, and at Friday’s opening session President Clinton spoke with an infective passion about this initiative. On stage with him was Madeleine Albright, who spoke of her experience as Secretary of State and her fight to protect human rights; Ray Barcott, a former marine with an MBA from Harvard Business School who described how he founded Carolina for Kibera, an organization aimed at breaking cycles of violence in and developing leaders from the Kibera slum of Nairobi, Kenya; Sadiga Basili Saleem, who founded and directs schools for girls in Afghanistan; the President of George Washington University, who spoke of the GW Center for Civic Engagement and Public Service and his involvement and promotion of the Center. And also on stage was Usher, yes, Usher, who spoke of his foundation and the work they do. Written questions were submitted to the panelists, and a student asked Usher about his inspiration, noting that “singing the answer is encouraged.” Usher reply by singing Whitney Houston’s “Greatest Love of All.” It was extraordinary!

And so I spent my week listening to the wisdom all of these amazing people, taking from each of them some lessons I hope to apply to my work on financial literacy.

Wednesday, March 7, 2012

The Financial Literacy Seminar Series restarts

I am very happy to announce that the Financial Literacy Seminar Series restarts this week. I have mentioned the series in previous posts and I am eagerly anticipating the inaugural seminar of the spring term to be held this Thursday, March 8.

After our last seminar in December we fielded a short online survey to ask our seminar attendees about the series. We received a lot of feedback and we have been analyzing it to continue to improve the series. Because we are nerdy economists, I cannot resist providing some of the statistics from the survey (but I will spare you the graphs and pie charts). As many as 76% of seminar attendees rated the seminars of consistently high quality—a finding that boosted my ego. Given that we had different seminar formats last fall, we asked what was preferred; nearly half of respondents prefer a seminar with one discussant and about one-third like short presentations with a panel discussion. We also asked about seminar topics. Retirement planning/saving, measurement of financial literacy, and financial education programs are the topics of interest cited most frequently by survey respondents.

Armed with all of this evidence and determined to do better each term, we have implemented the following changes to the seminar series:

Starting this semester we will have a Distinguished Financial Literacy Lecture. For this special seminar we will invite a speaker who has made a long-standing contribution to the field and who will discuss his or her research program rather than a specific paper. The distinguished speaker for the spring 2012 term is Peter Tufano, Dean of Oxford’s Saïd Business School.

We will coordinate our seminar series with DC meetings of other groups focused on financial literacy to maximize attendance. This spring, we plan to coordinate the seminar series with events organized by the American Savings Education Council (ASEC), the Insured Retirement Institute (IRI), and FINRA Investor Education Foundation.

We will conduct short interviews with the speakers about the main findings in their papers. These interviews will be posted on the FLSS web page along with the papers and presentations. Together with blog entries written to provide a summary of each seminar, we hope to distill the research presented in the series to its essential findings and implications.

We are exploring ways to encourage interaction between our seminar series and researchers and practitioners beyond the DC area. We are making contact with several national networks of researchers and practitioners working in financial literacy and plan to make use of technology to connect with remote audiences. We will also explore the possibility of sponsoring a conference on financial literacy, potentially with several government agencies interested in this topic.

Finally, we will have not only discussants but also a panel of experts to present work on effective financial education programs, and we will try to cover several of the topics that were of interest to seminar attendees.

We are thrilled that Peter Tufano has accepted our invitation to give the Distinguished Financial Literacy Lecture this week. His accomplishments are so many that I can’t begin to list all of them. He has developed courses on consumer finance, founded a non-profit R&D lab for new financial product development (, and served on advisory groups in the US (and now the UK) addressing the issue of financial inclusion. Before joining Oxford, Tufano spent 33 years at Harvard, most recently serving as Professor and Senior Associate Dean at Harvard Business School, as well as being the co-Founder of the Harvard University Innovation Lab (i-Lab).

I can only say that I cannot wait to hear Peter’s talk this Thursday!

The program for the spring 2012 Financial Literacy Seminar Series is provided on our web site:

Monday, February 20, 2012

New wave of STAR EMBA students

The new wave of STAR EMBA students has arrived on campus, and they started classes last Friday. I have written about this program in previous posts. This is an Executive Master in Business Administration (EMBA) at the George Washington University School of Business for Special Talent, Access and Responsibility (STAR) students, targeted to athletes, celebrities, and others. In addition to active and retired football players, the current class includes PGA golfers, Olympians, a TV personality, a music mogul manager, and a filmmaker. It is impossible not to spot them in the hallways of the business school, not only because on the first days they are wearing business suits and moving in groups, but also because of their “size,” in particular the football players.

As the School mentioned in the description of the program, “we continue to strive toward our mission of creating a powerful, informed and educated group of athletes and entertainers who are starting businesses, building media platforms, and getting recognized as national change makers and philanthropists.” It is exciting to have such a group of students, and I look forward to teaching them next week.

There are a few characteristics of this program and these students that are especially noteworthy. First, most of these individuals are very active in the community; they are involved in charitable organizations or have or plan to start their own foundations. The majority of these foundations are devoted to helping underprivileged children. Second, the program is open to spouses, as well. As with the first wave of students, in the second wave we have three spouses participating in the program. Finally, women are a growing group in this program. Let’s not forget, there are a lot of STAR women!

A group of faculty had dinner with this class last Friday both to welcome them to campus and to have them meet with Washington, DC-based students from the previous class. It was good to witness their enthusiasm for the program, passion for their work and activities, and curiosity to meet the other students. We had a guest speaker for dinner—an entrepreneur who spoke about his new firm, from how the idea originated to what it took to create and launch it. He spoke for a long time (and since dinner was not served until he finished, for me it felt very long), and so many hands went up after his talk that he kept answering questions for another hour (yep, and the dinner was delayed even further). I sat between two football players, one of whom was from the New York Giants. Of course we talked about the Super Bowl game but I refrained from asking him about the last five minutes of the game. Now that I know a lot more about football, I can have some good conversations with this group of students, and it is a lot of fun. Naturally, they are very conscious about their healthy eating. Since no one ate their bread, I could stuff myself with my and their bread while waiting for dinner to be served. The dinner—when it finally arrived—was very good, but the company was even better.

Wednesday, February 15, 2012

After the Super Bowl

I have watched most of the football games this season and now that the season is over, I wonder how I will spend my Sundays. Since I am new to this sport, I have sometimes watched the games while reading “Football for Dummies,” a book that turned out to be much better than I expected and does not deserve the smirks that my colleagues have offered (but perhaps they are smirking at the fact that I am such a football nerd). With football in mind, I want to discuss three topics in this post: fun, skill, and inspiration.

The games were very fun to watch and I enjoyed what comes with them as well. For Super Bowl, we had a pre-game party at my place, with all of my football fan friends. We ended up in an interesting discussion about strategies; I may have eaten too many nachos, but I did not understand the last five minutes of the Super Bowl game. We also enjoyed the commercials of course; I could not take my eyes off the TV screen.

Throughout the season, I saw great skill displayed on the field, the capacity to make critical decisions in a split second, the strenuous defense that some teams were able to put up, the ability to be so very precise, and the capacity to stay calm in a crisis. I have watched so many reversals of fortune just minutes before the end of a game that I have learned that one often cannot predict the winner until the second before a game is over. It is a tough game.

In addition to the games, I enjoy listening to player interviews. The players are articulate and succinct (a rare quality, believe me), and they are aware that many of their fans are watching. Like many, I like Tim Tebow a lot. He is unusual, but like other players, he is using his power and growing fame to make a difference in the lives of young people. Because of their enormous fame, football players have the capacity to influence so many people, to inspire them, to be role models.

And speaking of role models, when I talk about football players to young students, I point out that all of the players have college degrees and many of them from very good schools. I listened carefully to all of these schools at the Super Bowl when the players were running onto the field. Hey, Tom Brady is from the University of Michigan, and Eli Manning is from the University of Mississippi, and guess what, Eli majored in Business—how about that!

Another inspiring talent that players have is the capacity to inspire and motivate their team. I watched the video of Ray Lewis talking to his team after the loss against the Patriots. That was a very tough game and Ray offered both comfort and motivation to never give up and to do better the next time. The video ended with Ray greeting a very young fan and one of the players of the Ravens holding a little curly haired girl. Priceless! I, too, am a fan, and I can’t wait until next season.

Tuesday, February 7, 2012

Financial Literacy Program Wins “Business Gives Back” Award

Last weekend I attended an event organized by George Washington School of Business (GWSB) called “Business Gives Back.” Funds raised from these events are given to student-selected organizations and initiatives. At this particular event, a student who led a high impact initiative in the DC or global community was going to be given an award.

I am very happy to report that Amir Abdallah, who founded the Financial Literacy Program at GWSB, won the award. Amir founded the GWSB Financial Literacy Program (FLP) last spring in response to the growing need for increased engagement in the community around the issue of financial literacy. The FLP is a student-run volunteer placement program that sources financial literacy volunteering opportunities in the DC area. It is open to all GW graduate students, faculty, and alumni, regardless of program or professional background, and equips volunteers with the training and support-base to learn and spread financial literacy throughout our community. The mission is to provide opportunities that are mutually beneficial, meaningful, and challenging and that utilize the talents of the GW community to spread financial empowerment on and off campus. As their website, which is listed at the end of this post, says: “As responsible professionals and recipients of higher education, we are particularly well positioned to serve as ambassadors of financial education.”

Amir emailed me last year asking if we could meet to discuss financial literacy. I hadn’t met him and was curious to hear about his interest in financial literacy. The person who came to my office that day was a very soft-spoken Global MBA student, who sat down with a notebook and took many notes while we talked. He told me about his program, the way it is organized, and what it aims to achieve. He spoke with simplicity but with the pragmatism of a person who understands that things need to get done and implemented. There was passion in his voice and in his words for this topic—something I am always paying attention to.

Perhaps because he is slim and so articulate, that day Amir reminded me of a young President Obama; a young person who has thought to use his knowledge and skills to lead initiatives that can benefit society. And on Saturday, we celebrated the Financial Literacy Program that, from its inception, has reached 340 individuals (many of whom are students in poor schools). Amir was there on center stage. He described the program yet again using the combination of passion and pragmatism he had displayed when we first talked. He was irresistible and won by a wide margin. This blog is to celebrate a young leader.
You can see Amir’s big smile in the Washington Post article about the event: (

Wednesday, January 25, 2012

An America built to last needs to invest in education

In his State of the Union address President Obama spoke of an America “built to last.” I am glad that the focus of policy is turning to the long run. One essential component of such a built-to-last idea must deal with education. In an increasingly global and complex economy, citizens need to have the skills to successfully participate in labor markets, not to earn low and stagnating wages but wages that allow them to be part of a solid middle class, to send their children to college, and to save for retirement.

The President did talk of education and the important role of education. But it is going to take more than education reform that allows schools to be creative in their curriculum and to reward good teachers. America needs to invest in education if it wants an economy built to last. While it is good to invite state and local governments to devote more of their budgets to higher education rather than slushing education expenses, it is important to recognize that the federal government has an important role to play to foster education. More funds to research and technology can contribute not only to support higher education but also to fuel innovation and ideas that form the basis of growth (and the growth of well-paying jobs). Good education and solid training are also at the base of innovative entrepreneurship. Access to finance has been mentioned, by the President, too, as one of the major impediments to entrepreneurship, but in my view (and according to my research), education is far more important, in particular if the entrepreneurs we aim to cultivate are innovators rather than self-employed individuals who are trying to make a living. It is also important to recognize that a good education is not built on good colleges or community colleges alone but on a strong educational system, from kindergarten to college and beyond.

President Obama mentioned that college education cannot be a luxury. But with the cost of college rising faster than inflation and faster than the growth in wages, in particular in the lower part of the wage distribution, we are headed in that direction as the purchasing power of workers is not keeping up with the cost of a college education. If we are planning for the future, it is important to find ways to make college affordable and within reach of the many families that aspire to send their children to college. As I have mentioned in many of my previous posts, a college education is often the most important investment that a person can make.

I want to end this post with a statement that President Obama made during his address and that can be summarized as follows: teachers matter. This does not require much comment as it speaks for itself. All of us can name a teacher who has been influential in our life and who has made a difference. For me, it was my high school literature teacher. Her name is Ada Pucci. Even after more than 30 years, I think often of her and of the encouragement she gave me; we have talked on the phone over the years and when I am in Italy, and I go and visit her. Teachers matter, and they matter to what students can do in the long run. They too should be part of the policy for an America built to last.

Thursday, January 5, 2012

Wishes for the new year

As the new year starts, I have many wishes for financial literacy. I list the top three below:

Wish #1. I hope a leader to champion the cause of financial literacy will emerge and help give this topic the national and international attention it deserves. Michelle Obama has been the celebrity behind obesity and has helped not just raise attention around this important topic but also push for relevant programs in schools. There is a striking similarity between obesity and financial illiteracy. According to statistics, one third of the population is obese. Well, the same (and even worse) figures can be cited for financial illiteracy; about half of the population does not know the abc’s of finance and economics. There are severe costs associated with obesity, and there are equally severe costs of financial illiteracy (if in doubt, check the figures resulting from the financial crisis). A lot of initiatives have been undertaken at the national level to address obesity, from a revised food pyramid to limiting the amount of junk food available in cafeterias and vending machines. I may be one of five people in the country to know about the official web site offering financial information (do you want to guess which one it is?). Other celebrities have helped raise awareness of a variety of national and global problems. For example, Al Gore increased the attention on the environment and global warming. While I do not think the Artic will melt in the next few years (if I am wrong, please let me know), we are discussing or taking a lot of measures to address this long-term problem. On the other hand, the problem of financial illiteracy is urgent and pressing.

I do not have a strong preference about who this leader will be, but it would be good if he/she had a face (institutions are great, but it is hard to compete with Happy Feet). He/she should also be substantially liked by the public—a difficult objective in these days of falling financial geniuses, but there are many celebrities that people love. A sports celebrity would be great (Who does not like sports? Raise your hand!), in light of the similarity between success in sports and success with financial matters: it takes dedication, practice, and discipline!

Wish #2. I hope some BIG initiatives will emerge for financial literacy. As I have lamented in previous posts, a lot of the discussion about financial literacy has focused on its cost (as if we should or could offer it for free), and many initiatives to promote financial literacy are limited in scope and objectives. But this is a global problem that is becoming more and more pressing by the day (most of the political leaders in Europe have been ousted as a result of the sweeping financial crisis). This situation needs some big initiatives. How about a national campaign, or even a global initiative on financial literacy? How about a museum for financial literacy? We have declared April financial literacy month, so how about doing something concrete and big during that month (March or October are good for me too; I am not fussy about which month it occurs) that has lasting effects?

Wish #3. I hope the new year will see financial literacy in the schools; if not in the United States, then at least in a sizeable number of countries. Financial literacy is an essential tool for anyone who wants to be able to succeed in today’s society, make sound financial decisions, and—ultimately—be a good citizen. The financial crisis has put economic news on the front pages of newspapers almost daily, requiring individuals not just to be abreast of concepts such as deficit, national debt, and interest rate spread but also to evaluate the economic reforms that political leaders are proposing. Moreover, the cost of college education has been increasing at a rate faster than inflation, requiring students and their families to start planning for college as soon as possible, to be savvy about financial aid, and to manage student loans effectively. And young people are required to make one of the most important decisions of their lifetime—whether to invest in higher education—during high school, and they should make it in conjunction with a good understanding of the costs and benefits of that decision.

Perhaps I am only dreaming, but dreams are good. And my fourth wish is that all of you have a happy new year. Be in good financial health!