Academic Research on Financial Literacy Prof. Annamaria Lusardi The - - PowerPoint PPT Presentation

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SEC Investor Advisory Committee Washington DC, March 9, 2017 Academic Research on Financial Literacy Prof. Annamaria Lusardi The George Washington University School of Business Academic Director, Global Financial Literacy Excellence Center

SLIDE 1

Academic Research on Financial Literacy

Prof. Annamaria Lusardi

The George Washington University School of Business Academic Director, Global Financial Literacy Excellence Center

SEC Investor Advisory Committee Washington DC, March 9, 2017

SLIDE 2

Big 3 questions:
Numeracy/interest rate
Inflation
Risk diversification
Being financially literate: How many can answer these 3

questions correctly?

These 3 questions have been used in 15 countries: Financial

Literacy around the World (FLAT World) project

Investors need basic financial knowledge

SLIDE 3

Financial literacy over time in the US

Financial knowledge did not increase since 2009

39% 34% 32%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 2009 2012 2015

% of people correctly answering big 3 questions

Source: 2009, 2012, 2015 NFCS data

SLIDE 4

Financial literacy by age in the US

(% answering Big 3 questions correctly)

Source: 2015 NFCS data

Financial knowledge increases very slowly with age
Less than 1/3 know 3 basic questions by age 40 even though most

important decisions are made well before that age

13% 18% 24% 27% 35% 36% 38% 37% 44% 47% 51% 42% 0% 10% 20% 30% 40% 50% 60% 18-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+

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Risk is the most difficult concept to grasp

Correct Incorrect Don't know Interest rate question 75% 13% 12% Inflation question 59% 20% 20% Risk question 46% 10% 44%

“Do not know” responses to risk diversification question are dramatically high
Our recent data from 10 European countries shows that risk-related concepts

are the least understood

Source: 2015 NFCS data

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Financial literacy among investors

Financial knowledge is not much higher among investors
Only 1 in 2 investors answer correctly 3 basic questions

Source: 2015 NFCS data

75% 59% 46% 83% 71% 65% 83% 69% 60% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Interest rate question Inflation question Risk question

% of correct answers

General population Investors People with investments or self-directed retirement account

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Financial sophistication

More complex questions were asked in other surveys, for

example:

Assets pricing
Knowledge of sophisticated concepts is lower
E.g., 43% of investors have assets pricing knowledge
Economic/finance jargon is not understood
“Don’t know” responses increase when jargon is used
Especially important for women

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Mismatch between actual and perceived financial knowledge

Despite low levels of financial literacy, Americans have high self-perceptions
f their financial knowledge
The mismatch is high among investors too

Source: 2015 NFCS data

32% 51% 47% 76% 90% 87% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% General population Investors People with investments or self- directed retirement account Basic financial literacy High perception of financial knowledge

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Implications from academic research

Need to step up the effort on financial education
Important to prepare the next generation of investors
Because risk is particularly difficult to grasp, visualization or
ther strategies may help
Different strategies to communicate with investors
Keep the message free of complex terminology
More targeted messages to population subgroups

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Contact and further information

Annamaria Lusardi Global Financial Literacy Excellence Center (GFLEC) E-mail: alusardi@gwu.edu Webpage: www.gflec.org Twitter: @A_Lusardi WSJ blog: http://blogs.wsj.com/experts/tag/annamaria-lusardi/