Measuring the Effectiveness of Financial Literacy

by | 03/02/14 | Commentary, Insight, Uncategorized

When it comes to money, several factors play a part in the financial behavior of an individual, including the impulse of buying, retail therapy, advertising, social status, spending habits, bargain hunting, emotional context and the broader social culture.  For years, many have considered and evaluated the extent to which financial education also impacts financial behavior.

Below is a review of two widely followed studies that explore this question:

FINANCIAL EDUCATION AND THE DEBT BEHAVIOR OF THE YOUNG - Federal Reserve Bank of New York Staff Report, September 2013

Objective:  To understand the relationship between financial education and debt use, and particularly whether financial illiteracy is the cause of poor debt-related outcomes in early adulthood.

Method: The timing of the enactment of financial education reforms in high school curricula across, as well as within, states is observed.  Using a rich set of time-varying controls, policy changes and their impact of financial education on debt-relation outcomes of youth are analyzed by observing changes in the detailed consumer liability data from the Consumer Credit Panel.  

Findings:

  • Financial literacy education has a modest impact on the propensity of youth having a credit report.
  • Math and financial literacy education exposure reduces the incident of adverse outcomes – such as accounts in collections and delinquent accounts – and reduces both the likelihood of youth carrying debt and their average debt balances.
  • During a difficult era for young first-time home buyers, both math and financial literacy education exposure delay entry into home ownership.  The net effect of both math and financial literacy education is an increase in the youths’ average creditworthiness, as measured by the Equifax risk score.
  • On the other hand, economic education leads to significant increases in debt market participation and debt balances – in particular, debt used to support consumption.  It increases the likelihood of adverse credit outcomes, leading to a decline in youths’ average risk scores.
  • Results suggest the policies on financial education will have a significant impact on financial-decision making – depending on the content of the program.

THE EFFECT OF FINANCIAL EDUCATION ON DOWNSTREAM FINANCIAL BEHAVIORS - Sponsored by National Endowment for Financial Education, June 2013

Objective: Financial Education has been embraced as the antidote for the complexities of consumers’ financial decisions.  The study aims to analyze the relationship of financial education on the financial decision making.

Method:  Reviews past studies on Financial Literacy and identifies the following:

  • Experimental and quasi-experimental studies of the effects of financial education interventions.
  • Correlational and econometric studies that measured financial literacy by percent of correct answers on tests of financial knowledge and predicted downstream financial behaviors.
  • 155 papers covering 188 studies undergo a meta-analysis in which four basic questions are asked: (i) Is there a statistically significant effect?  (ii) What’s the magnitude of the effect?  (iii) Was there systematic variation in effect-sizes across studies beyond what would be expected by chance? (iv) If variation across studies is significant are there systematic features of studies that explain why the effect-sizes are larger for studies with those features?

Findings:

  • Behaviors and Literacy as Measured Today Are Weakly Linked:  Educational interventions and financial literacy as measured to date are only weakly linked to behaviors — much less so than in comparable domains, such as workplace education or career counseling interventions.
  • The Amount and Timing of Financial Education Matters:  When it comes to attempts at building financial literacy to shape behavior, education that closely precedes a financial decision has more impact.  Diminishing returns also mean that more education is not always better unless education is timed closely to points of decision.
  • Findings from Past Investigations Merit Revisiting:  Different classes of studies have yielded such disparate results — more varied than expected — that we must question the extent to which those differences stem from the need for improved research designs and analyses.

To explore these and other financial literacy measurement studies in greater detail, visit the FinancialCorps Research Database.

Become a Member

Join financialcorps today to get access to exclusive content, networking community, and inside information to the world of financial literacy.

Subscribe

to the top financial literacy news from the world’s leading financial education funders, news sources, analysts and commentators, e-mailed to you FREE.