Archive for May 15th, 2008

Does financial education lead to better money management?

May 15, 2008

It is usually assumed that financial literacy will lead to better management of personal finances. I came across this Richmond Fed short note on efficacy of financial education which is quite interesting.

First, it says there is little doubt about the role of financial education/literacy but its effect on fiancial outcomes  is unclear.

Second, It points to two papers which reviews the developments and says not all such awareness programs are effective.

The two biggest problems are: 1) a lack of control groups, and
2) a dearth of longitudinal data (which follow people over time to track their learning and behavior). Additionally, there are questions about how to best measure growth in financial literacy among individuals. Do you simply look at their debt and savings after the fact? Their ability to live within their means? Their general level of satisfaction about their financial situations?

Third, it points to ongoing research at Fed which tries to understand the causation better.

A study now under way at the Federal Reserve Board of Governors aims to overcome the largest problems with financial education research. The Board researchers are following the financial behaviors of two sets of young people, one of which has experienced a two-day financial education program, and another that didn’t. Both groups share basically the same demographic makeup, live in the same place, work for the same employer, and perform substantively similar jobs. They are all young soldiers at Ft. Bliss, an Army base in El Paso, Texas.

Hmm, this is going to be a really interesting study as it is based on the MIT-PAL’s randomization techniques.

So finally, after that usual policy approach of just implementing a plan/program without understanding its effectiveness is being questioned.  I am seeing more and more radomised evaluation programs understanding what works and what doesn’t work in financial education. These techniques of MIT-PAL need to be implemented at a wider scale and scope.

Assorted Links

May 15, 2008

1. WSJ Blog points to Volcker testimony

2. Nudges points to using defaults to save energy in electric appliances

3. PIB has a fantastic post- Is running to the subway irrational or not?

4. Mankiw points to Joe Stigilitz take on inflation targeting

5. Rodrik points to comments by former IMF chief on financial markets- nice turnaround huh?

6. Fin Prof points to a paper saying it is tough for property funds beating real estate markets

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