Financial education may be effective in raising financial literacy, but its effect on financial behaviours is more complicated

I have previously conducted research on financial literacy among teenagers, and continue to explore economic literacy among university students. As my previous research has shown (see here; with ungated earlier version here), financial literacy is low. It isn't just low among the teenagers we studied; financial literacy is low across society more generally (e.g. see here).

An obvious solution would seem to be to build up financial education. For example, making financial education compulsory in schools might increase financial literacy. So might making accessible adult financial literacy courses more available. In my reading of the previous research on financial education, it seemed to me that the evidence of the effectiveness of financial education is weak. However, I have been known to be wrong on occasion, and this might be one such occasion.

The evidence on the impact of financial education on financial literacy and financial behaviour is reviewed in this 2017 meta-analysis article by Tim Kaiser (University of Kiel) and Lukas Menkhoff (German Institute for Economic Research), published in the journal World Bank Economic Review (ungated earlier version here). Kaiser and Menkhoff's meta-analysis is based on 126 impact evaluation studies, and they summarise their findings as (emphasis is theirs):

...(i) increasing financial literacy helps. Financial education has a strong positive impact on financial literacy with an effect size of 0.26 (i.e., above the threshold value of 0.20 that characterizes “small” statistical effect sizes...). Moreover, effects on financial literacy are positively correlated with effects on financial behavior; (ii) financial education has a positive, measurable impact on financial behavior with an effect size of 0.09. An effect size of 0.08 is still found under rigorous randomized experiments (RCTs); (iii) effects of financial education depend on the target group. First, teaching low-income participants (relative to the country mean) and target groups in low- and lower-middle–income economies has less impact, which is an obvious challenge for policymakers targeting the poor. Second, it appears to be challenging to impact financial behavior as country incomes and mean years of schooling increase, probably because high baseline levels of general education and financial literacy cause diminishing marginal returns to additional financial education; (iv) success of financial education depends on the type of financial behavior targeted. We provide evidence that borrowing behavior may be more difficult to impact than saving behavior by conventional financial education; (v) increasing intensity supports the effect of financial education; and (vi) the characteristics of financial education can make a difference. Making financial education mandatory is associated with deflated effect sizes. By contrast, a positive effect is associated with providing financial education at a “teachable moment” (i.e., when teaching is directly linked to decisions of immediate relevance to the target group...).

I think there is a lot of good news that we can take away from that meta-analysis. However, notice that mandatory education doesn't make much difference, and targeting financial education at the right groups and at the right times ('teachable moments') is likely to be most effective.

The effect on financial behaviours might be the most questionable though. Kaiser and Menkhoff merge a huge variety of behavioural effects together in their meta-analysis, everything from reducing informal borrowings (e.g. from a moneylender), to having a bank account or insurance, to having a financial plan, to measures of net wealth. So, it's difficult to interpret what behaviours are actually improved by financial education. Were all financial behaviours improved? That seems unlikely. Which behaviours improved, and which did not? Did the characteristics of the target group and the type of financial education matter for which behaviours were affected? These questions are left unanswered. Also unanswered is the important question of what the mechanism for changes in financial behaviours is. We clearly need more studies linking financial education, financial literacy, and financial behaviours, but where the particular behaviours are pinned down.

That brings me to this recent article by Kenneth De Beckker, Kristof De Witte, and Geert Van Campenhout (all KU Leuven), published in the Journal of Economic Behavior and Organization (ungated earlier version here). They ran a randomised controlled trial among Flemish school students (average age 13) from 20 schools. In the trial, they gave treated students access to an online financial literacy course. De Beckker et al. explain:

The course deals with budgetary choices in everyday life. Afterwards, students are expected to be familiar with concepts like interest and inflation, have insight in different saving and investment products, understand the benefits of saving for long-term goals or unanticipated expenses, and grasp the risks of credit. The learning path consists of five modules with multiple exercises, information sheets and a formative test. The exercises contain videos, interactive learning games, and case studies adapted to the living environment of students from the eighth and ninth grade.

De Beckker et al. then measured students' financial literacy, as well as their financial behaviour, comparing students who were given access to the course with control students who were not. The 'financial behaviour' is measured using a discrete choice experiment, where students were presented with various hypothetical choices about the purchase of a new smartphone at various prices, and where some of the options required direct cash payments, whereas others had a payment plan. This research design allows them to look at how the financial education course affects the students' preferences for the smartphone purchase. That is, they can look at whether the financial education makes them more price sensitive, or more likely to avoid purchasing on credit.

Turning to their results, De Beckker et al. found that the course was effective in raising financial literacy among the students:

The results provide evidence that the financial education course is effective. Controlling for all observed heterogeneity in terms of school and student characteristics, the financial education course increases students’ financial literacy scores by 0.46 standard deviations on average...

However, in terms of financial behaviour:

Overall, we observe that the treatment does not affect how attributes like price, credit availability, information on the quality of the product and promotions are valued. This suggests that the financial education course increased students’ level of financial literacy but this did not trickle down further: students did not change their buying behavior. 

That is disappointing. The results of a single study of young Flemish teenagers is not enough to overturn the meta-analysis by Kaiser and Menkhoff. However, I think we need to consider further the mechanisms through which financial education, and financial literacy, lead to financial behaviour. Perhaps these students' hypothetical decisions were not affected, but the result might be different for financial education delivered at 'teachable moments'. Exploring the mechanisms further in future research would help policy makers and financial educators to better design financial education programmes (whether mandatory in schools, or delivered at 'teachable moments' like before a student takes out a student loan, or a first home buyer takes out a mortgage), so that financial behaviour is better aligned at improving people's long-term financial wellbeing.

Financial literacy among teenagers

Diana Clement used some of my recent research in an article in the New Zealand Herald on Saturday about teenagers and money. Diana writes:

The University of Waikato tested the financial literacy of more than 300 students at Hamilton secondary schools. It showed that the longer teens had held a bank account the more financially literate they were, says co-author Michael Cameron, a senior lecturer in economics.

We did evaluate the financial literacy of 15-year-olds in Hamilton in 2013, using a New Zealand adaptation of the U.S. Financial Fitness for Life survey. This resulted in two publications: (1) comparing financial literacy between students in Japan, the U.S., and New Zealand (here; ungated earlier version here); and (2) identifying the factors associated with financial literacy (here; ungated earlier version here). Co-authors included Steven Lim, Ashleigh Cox, and Richard Calderwood (all from the University of Waikato), and Michio Yamaoka (Waseda University, Japan).

The first paper can essentially be summarised in a sentence: New Zealand teenagers' financial literacy is similar to those in the U.S., but not as good as those in Japan. In this blog post, I'll elaborate a bit on the second paper, which has some interesting results.

In our sample of Hamilton teenagers, we found that financial literacy was lowest among financially poorer students, those with less English ability, and those with less mathematical ability. We also found that older students, those who had studied economics or business studies, and those who had held a bank account for longer, had higher financial literacy. The data came from a cross-sectional survey, so these are correlations - we can't directly attribute causality here. However, I'm going to speculate on what the results mean nonetheless.

Students with less English ability have more trouble interpreting written questions in general - so it is unsurprising that they perform less well in the multiple-choice financial literacy test (we see similar results with international students in our test of economic literacy in ECON100 - see here for example; ungated earlier version here). Similarly, students who have studied economics or business studies and those with higher mathematical ability are likely to be more able students - so their higher financial literacy scores probably reflect a greater test-taking ability (much as we might hope that high school economics or business studies instills students with financial literacy, student ability is more likely to be driving these results).

The other results are more interesting from a policy or intervention perspective - students from households in richer parts of the city (a proxy for parental wealth), those who are older, and those who have held a bank account for longer, have higher financial literacy. There are plausible causal mechanisms here, even if we can't say so definitively. If richer parents are better at managing their money (that might be a big 'if'!), then that might pass onto their children - particularly if the parents are modelling good savings behaviour (another big 'if'). So, having parents and their children in joint financial literacy education programmes (such as this one based in Tauranga), especially if they are parents from more deprived areas, may be a useful way to increase financial literacy in both groups. Having parents understanding saving and budgeting better can hardly be a bad thing in any case.

Older students and those who have held a bank account for longer have probably been interacting with the market and managing (to some extent) their own finances for longer, developing useful skills and financial understanding along the way (hopefully!). The effects were small (an additional year of having a bank account was associated with 0.2 additional correct questions out of 50 in the financial literacy test), but highly statistically significant. Getting teenagers to take responsibility for (some of) their finances is probably useful, particularly while the environment can be easily controlled by parents. Diana writes:

Bart Frijns, director of AUT's Centre for Financial Research, says that children learn more about money by setting up and using a bank account than they do in a general education programme on savings.

I agree with Bart - financial literacy programmes for teenagers have shown a remarkable lack of success (e.g. see here (PDF)). Probably it is better to just get on and let teenagers take on some responsibility, make some (relatively minor) mistakes, and then provide them with guidance and education when they need it. Want a credit card? Want to take out a student loan? Or a car loan? Or a mortgage? Complete this short course on how best to handle credit. Such a just-in-time learning approach for financial literacy means that it is less likely that the learner will forget before they go to apply their knowledge. This is handy for credit, but might not be as useful for savings. Which is what I am working on now - what do teenagers really know about savings? More on that in a later post.