The PISA Approach to Measuring Financial Literacy

In our continuing coverage of the topic of measuring financial literacy, we explore in greater detail assessment and results promulgated by the Organization for Economic Cooperation and Development, which released news a few months ago relating to its Program for International Student Assessment, which is conducted once every three years. A wide range of results was evident, with countries like China ranking at the higher end, while other nations, such as the United States, ranked below average.

Data on financial literacy is important as it allows us to analyze if the financial education initiatives are truly effective. Measuring financial literacy for 15-year-olds enables us to predict the financial capability skills of adults in the near future. For all of these reasons, let’s take a look at the process of such studies.

• In 2012, 18 countries participated in the study (13 OECD countries and economies: Australia, the Flemish Community of Belgium, the Czech Republic, Estonia, France, Israel, Italy, New Zealand, Poland, the Slovak Republic, Slovenia, Spain and the United States; and five partner countries and economies: Colombia, Croatia, Latvia, the Russian Federation and Shanghai-China).

• 29,000 students completed the assessment, which represented 9 million 15-year-olds in the school.

• The assessment was a paper based test that lasted for two hours for each student.

• There were two clusters of financial literacy items that were tested: mathematics and reading.

• Some questions required students to generate their own answers, while others required students to choose alternatives to from a given set of options.

PISA has four content themes for these questions:

1. Money and Transactions:  Awareness of the different forms and purposes of money and handling simple monetary transactions, such as everyday payments, spending, value for money, bank cards, cheques, bank accounts and currencies.

2. Planning and Managing Finances:  Planning and managing of income and wealth over both the short term and long term, and in particular the knowledge and ability to monitor income and expenses, as well as to make use of income and other available resources to enhance financial well-being.

3. Risk and Reward:  Managing, balancing and covering risks (including through insurance and saving products) and an understanding of the potential for financial gains or losses across a range of financial contexts and products, such as a credit agreement with a variable interest rate, and investment products.

4. Financial Landscape:  Covers knowing the rights and responsibilities of consumers in the financial marketplace and within the general financial environment, and the main implications of financial contracts. It also incorporates an understanding of the consequences of change in economic conditions and public policies, such as changes in interest rates, inflation, taxation or welfare benefits.

An example of a question for money and transaction would involve a pay slip indicating gross salary and deductions and then asking students to identify the amount that the employer will actually send to the employee’s bank account.

Questions within the each content theme focus on the following:

Identify financial information: Student is required to search and access sources of financial information and recognize their relevance.

Analyze information in a financial context: Student must interpret, compare and extrapolate from information that is provided.

Evaluate financial issues: Student needs to construct financial justifications and explanations, drawing on financial knowledge and understanding applied in specified contexts.

Apply financial knowledge and understanding: Student is required to outline effective actions in a financial setting by using knowledge of financial products and contexts and understanding of financial concepts.

The study also takes into account whether the students have been exposed to financial education in their school and how long it has been available to them. By doing so, cohorts of students are established for relevant comparisons.

By understanding these measurement techniques, financial literacy courses can be monitored and measured in schools. Direct uplift in financial literacy can be measured by getting results from questions and surveys from students before and after the introduction of a financial literacy course. Such measurements can form success case studies to proliferate formalized financial literacy courses across high schools and college throughout the world.