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![Page 1: Treating Financial Literacy: Promising Alternatives to Financial Education Jonathan Zinman Dartmouth College November 14, 2007.](https://reader036.fdocuments.in/reader036/viewer/2022082820/56649e6f5503460f94b6cbaf/html5/thumbnails/1.jpg)
Treating Financial Literacy:Promising Alternatives to
Financial Education
Jonathan ZinmanDartmouth CollegeNovember 14, 2007
![Page 2: Treating Financial Literacy: Promising Alternatives to Financial Education Jonathan Zinman Dartmouth College November 14, 2007.](https://reader036.fdocuments.in/reader036/viewer/2022082820/56649e6f5503460f94b6cbaf/html5/thumbnails/2.jpg)
Do We Need Financial Education?
Our panel’s intro:
“The importance of financial education is universally held….”
Not true.
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Does Fin Ed Work Well?
Evidence suggests not:• Choi et al Brookings PEA 2005• Benartzi and Thaler Journal of Economic
Perspectives 2007
In the most convincing studies:• Randomized trials find small effects• Event studies (Enron, etc.) find small effects• And of course takeup is low
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Consumer Debt Crisisand Financial Ed
But doesn’t: “the recent proliferation of mortgage defaults and foreclosures show how difficult it is to reach those who need financial education at the right time with the right information”
Not necessarily: risk vs. return/reward• Financial contracts are gamblesAnd…
![Page 5: Treating Financial Literacy: Promising Alternatives to Financial Education Jonathan Zinman Dartmouth College November 14, 2007.](https://reader036.fdocuments.in/reader036/viewer/2022082820/56649e6f5503460f94b6cbaf/html5/thumbnails/5.jpg)
Back to Square One:Objectives?
• Info, comprehension ~= “education”
• Financial literacy vs. financial education– Ed. as a “treatment” for literacy– There are alternative treatments that are
probably more cost-effective– And more feasible mass-produce in real time
![Page 6: Treating Financial Literacy: Promising Alternatives to Financial Education Jonathan Zinman Dartmouth College November 14, 2007.](https://reader036.fdocuments.in/reader036/viewer/2022082820/56649e6f5503460f94b6cbaf/html5/thumbnails/6.jpg)
What’s Financial Literacy?
• “Financial survival skills”
• Simple rules to live by
• Not = profound understanding per se
• Medical analogy– Seek preventative care vs. take biochem.– Get expert answers vs. DIY– Comply (take your meds) vs. backslide
![Page 7: Treating Financial Literacy: Promising Alternatives to Financial Education Jonathan Zinman Dartmouth College November 14, 2007.](https://reader036.fdocuments.in/reader036/viewer/2022082820/56649e6f5503460f94b6cbaf/html5/thumbnails/7.jpg)
Examples ofFinancial Survival Skills
Process and planning:
• Make a plan– For contingencies– Retirement
• When in doubt get expert advice
• Regular check-ups
• Avoid company stock
![Page 8: Treating Financial Literacy: Promising Alternatives to Financial Education Jonathan Zinman Dartmouth College November 14, 2007.](https://reader036.fdocuments.in/reader036/viewer/2022082820/56649e6f5503460f94b6cbaf/html5/thumbnails/8.jpg)
Examples of Survival Skills
Dealing with prices/offers:• If revolving on a credit card, do it on the lowest
rate card you have/can get• When considering very short-term loans, ignore
the interest rate and focus on costs vs. returns• Medium-term loans: double simple interest to get
the APR• Saving: Rule of 72 tells you how fast money
doubles• Seriously consider 401k when there’s a match,
even if strapped
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Do We Need To TreatFinancial Literacy?
• Probably yes.• Mounting evidence that literacy lacking
– Many (most?) consumers make mistakes– Many mistakes economically serious
• Most pernicious: consumer have biases that get exploited in market– And exploited more in unregulated/informal markets
• Bias = mistake in a particular direction– Overborrowing– Undersaving– Underplanning– Undertracking (spending)
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How to Treat Financial Literacy?
Some lessons/ideas from social science research:
1. Social marketing of survival skills
2. Savvier marketing of savings products
3. Improve loan disclosures
4. Develop new products that:• Appeal to consumers• While neutralizing their biases
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How to Treat Financial Literacy?
1. Social Marketing of survival skills• On mass basis
Who has incentive to do this?• Government• Nonprofits• Mutual fund retailers• (Commercial banks)
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How to Treat Financial Literacy?
2. Savvier Marketing of savings products
• Future values not yields
• High-frequency feedback when savings rate plausibly inadequate– Consumer sets goal at beginning
• Target markets– Low-yield savers– Discretionary borrowers
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How to Treat Financial Literacy?
3. Improve loan disclosures– Board and FTC efforts laudable
• Approach: painstaking experimentation– Need more research based on actual
decisions
• Disclosures complement dissemination of survival skills– Consumer need to know how to interpret
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How to Treat Financial Literacy?
4. Product Development• Commitment products
– For spending control– For savings goals– For self-control more generally
• Planning products– Mass-producing expert advice a challenge
• Tracking products– E.g., for credit card spending
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Big Lesson
• Research matters– “Retail financial engineering” from behavioral finance– Researchers as “financial doctors”
• Theory, programs, and policy far ahead of knowledge of what actually works
• We have the tools and expertise to identify what works now
• Just takes a bit of effort, time, and $$– But just a small fraction of the resources we spend on
ineffective programs and capricious policy changes