Hostname: page-component-586b7cd67f-rdxmf Total loading time: 0 Render date: 2024-11-28T23:04:49.205Z Has data issue: false hasContentIssue false
  • English
  • Français

Learning by doing: the role of financial experience in financial literacy

Published online by Cambridge University Press:  21 November 2013

Bart Frijns ,
Aaron Gilbert  and
Alireza Tourani-Rad
Bart Frijns
Affiliation:
Department of Finance, Auckland University of Technology, New Zealand E-mail: [email protected]
Aaron Gilbert
Affiliation:
Department of Finance, Auckland University of Technology, New Zealand E-mail: [email protected]
Alireza Tourani-Rad
Affiliation:
Department of Finance, Auckland University of Technology, New Zealand E-mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper, we examine the impact of financial experience on financial literacy. Exploiting a unique feature of New Zealand, whereby domestic students can obtain interest-free student loans and can fully participate in the national retirement scheme while international students cannot, we employ an instrumental variables approach to identify the causal effect of financial experience on financial literacy. We conduct surveys on a sample of 338 business students and find that there is a positive and causal effect of financial experience on financial literacy. Our results have important implications for financial education programmes and may explain why many of these programmes to date have had limited success.

Keywords

A20G00.causalityfinancial experiencefinancial literacyinstrumental variable analysis
Type
Research Article
Information
Journal of Public Policy , Volume 34 , Issue 1 , April 2014 , pp. 123 - 154
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Agarwal, S., Driscoll, J., Gabaix, X. Laibson, D. (2009) Financial Decisions over the Lifecycle with Implications for Regulation. Brookings Papers on Economic Activity 2: 51–101.Google Scholar
Anderson, S., Zhan, M. Scott, J. (2004) Targeting Financial Management Training at Low-Income Audiences: Bits, Briefs, and Applications. Journal of Consumer Affairs 38: 167–177.Google Scholar
Banks, J. Oldfield, Z. (2007) Understanding Pensions: Cognitive Functions, Numerical Ability and Retirement Saving. Fiscal Studies 28: 143–170.CrossRefGoogle Scholar
Bayer, P., Bernheim, B., Scholz, J. (1996) The Effects of Financial Education in the Workplace: Evidence from a Survey of Employers. Working Paper Issue 5655, NBER, Cambridge, MA.CrossRefGoogle Scholar
Bell, E. Lerman, R. (2005) Can Financial Literacy Enhance Asset Building? Opportunity and Ownership Project 6: 1–8.Google Scholar
Bernheim, B. Garrett, D. (2003) The Effects of Financial Education in the Workplace: Evidence from a Survey of Households. Journal of Public Economy 87: 1487–1519.Google Scholar
Bernheim, B., Garrett, D. Maki, D. (2001) Education and Saving: The Long-Term Effects of High School Financial Curriculum Mandates. Journal of Public Economy 80: 435–465.CrossRefGoogle Scholar
Bradley, D., Hirad, A., Perry, V., Zorn, P. (2001) Is Experience The Best Teacher? The Relationship between Financial Knowledge, Financial Behavior, and Financial Outcomes, paper submitted to Rodney L. White Center for Financial Research, University of Pennsylvania, Workshop on Household Financial Decision Making, March.Google Scholar
Braunstein, S. Welch, C. (2002) Financial Literacy: An Overview of Practice, Research and Policy. Federal Reserve Bulletin 11: 445–457.Google Scholar
CFS (2001) Consumer Survey on Finance, The Central Council for Financial Services Information, Japan.Google Scholar
Christelis, D., Jappelli, T. Padula, M. (2010) Cognitive Abilities and Portfolio Choice. European Economic Review 54: 18–38.CrossRefGoogle Scholar
Choi, J., Laibson, D., Madrian, B. Metrick, A. (2006) Saving for Retirement on the Path of Least Resistance. In McCaffrey E. J. and Slemrod J. (eds.), Behavioral Public Finance: Toward a New Agenda (pp. 304–351). New York, NY: Russell Sage Foundation.Google Scholar
Colmar Brunton (2006) ANZ-Retirement Commission Financial Knowledge Survey. Auckland: Retirement Commission.Google Scholar
Colmar Brunton (2009) ANZ-Retirement Commission Financial Knowledge Survey. Auckland: Colmar Brunton.Google Scholar
Duflo, E. Saez, E. (2003) The Role of Information and Social Interactions in Retirement Plan Decisions: Evidence from a Randomized Experiment. Quarterly Journal of Economics 118: 815–842.Google Scholar
Dvorak, T. Hanley, H. (2010) Financial Literacy and the Design of Retirement Plans. Journal of Socio-Economics 39: 645–652.Google Scholar
Elliehausen, G., Lundquist, C. Staten, M. (2003) The Impact of Credit Counseling on Subsequent Borrower Behavior. Journal of Consumer Affairs 41: 1–28.CrossRefGoogle Scholar
Financial Services Authority (FSA) (2006) Levels of Financial Capability in the UK: Results of a Baseline Survey, consumer research 47, Financial Services Authority, London, UK.Google Scholar
Greenspan, A. (2003) The Importance of Financial and Economic Education and Literacy. Social Education 67: 70–72.Google Scholar
Greenspan, A. (2005) The Importance of Financial Education Today. Social Education 69: 64–66.Google Scholar
Hastings, J., Mitchell, O. (2011) How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviours. NBER Working Paper No. 16740, NBER, Cambridge, MA.Google Scholar
Hastings, J., Mitchell, O., Chyn, E. (2010) Fees, Framing, and Financial Literacy in the Choice of Pension Managers. Pension Research Council Working Paper, Wharton School, Summer, Philadelphia, PA.CrossRefGoogle Scholar
Hastings, J., Tejeda-Ashton, L. (2008) Financial Literacy, Information, and Demand Elasticity: Survey and Experimental Evidence from Mexico. NBER Working Paper No. 14538, Cambridge, MA.Google Scholar
Hilgert, M., Hogarth, J. Beverly, S. (2003) Household Financial Management: The Connection Between Knowledge and Behavior. Federal Reserve Bulletin 89: 309–322.Google Scholar
Hirad, A., Zorn, P. (2001) A Little Knowledge is a Good Thing: Empirical Evidence of the Effectiveness of Pre-Purchase Homeownership Counselling. Working Paper, Freddie Mac, McLean, VA.Google Scholar
Kimball, M., Shumway, T. (2006) Investor Sophistication, and the Participation, Home Bias, Diversification, and Employer Stock Puzzles, mimeo, University of Michigan, Ann Arbor, MI.Google Scholar
Lusardi, A. (1999) Information, Expectations, and Savings for Retirement. In Aaron H. (ed.), Behavioral Dimensions of Retirement Economics. Washington, DC: Brookings Institution Press and Russell Sage Foundation, 81–115.Google Scholar
Lusardi, A. (2008) Household Saving Behaviour: Financial Literacy, Information and Financial Education Programs. NBER Working Paper 13824, Cambridge, MA.Google Scholar
Lusardi, A., Mitchell, O. (2009) How Ordinary Consumers Make Complex Economic Decisions: Financial Literacy and Retirement Readiness, mimeo, Wharton School, Cambridge, MA.CrossRefGoogle Scholar
Lusardi, A., Mitchell, O. (2011) Financial Literacy Around the World: An Overview. Journal of Pension Economics and Finance 10: 497–508.Google Scholar
Lusardi, A., Tufano, P. (2009) Debt Literacy, Financial Experience and Overindebtedness. Working Paper, Harvard Business School, Cambridge, MA.Google Scholar
Lyons, A., Palmer, L., Jayaratne, K. Scherpf, E. (2006) Are We Making the Grade? A National Overview of Financial Education and Program Evaluation. The Journal of Consumer Affairs 40: 208–235.Google Scholar
Madrian, B., Shea, D. (2001) Preaching to the Converted and Converting Those Taught: Financial Education in the Workplace. Working Paper, University of Chicago, Chicago.Google Scholar
Mandell, L. (2008) The Financial Literacy of Young American Adults: Results of the 2008 National Jump$tart Coalition Survey of High School Seniors and College Students. Seattle, WA: University of Washington and the Aspen Institute.Google Scholar
Mandell, L. (2009). The Impact of Financial Education in High School and College on Financial Literacy and Subsequent Financial Decision Making. American Economic Association Meetings, January 2009, San Francisco, CA.Google Scholar
Mandell, L. Klein, L. (2009) The Impact of Financial Literacy Education on Subsequent Financial Behaviour. Journal of Financial Counseling and Planning 20: 15–24.Google Scholar
Moore, D. (2003). Survey of Financial Literacy in Washington State: Knowledge, Behavior, Attitudes, and Experiences. Technical Report No. 03-39, Social and Economic Sciences Research Center, Washington State University, Pullman.Google Scholar
National Association of State Boards of Education (2006) Who Owns Our Children? Alexandria, VA: National Association of State Boards of Education.Google Scholar
National Council on Economic Education (2008) Economic, Personal Finance & Entrepreneurship Education in Our Nation's Schools, a Report Card. New York, NY: National Council on Economic Education.Google Scholar
Nielsen, A.C. (2005) ANZ Survey of Adult Financial Literacy in Australia: Final Report. Melbourne: ANZ Bank.Google Scholar
OECD (2005) Improving Financial Literacy: Analysis of Issues and Policies. Paris: OECD Publishing.Google Scholar
Roy Morgan Research (2003) ANZ Survey of Adult Financial Literacy in Australia: Final Report. Melbourne: ANZ Bank.Google Scholar
Roy Morgan Research (2008) ANZ Survey of Adult Financial Literacy in Australia: Final Report. Melbourne: ANZ Bank.Google Scholar
Sherraden, M., Johnson, L., Elliot, W. III, Porterfield, S. Rainford, W. (2007) School-Based Children's Saving Accounts for College: The I Can Save Program. Children and Youth Services Review 29: 294–312.Google Scholar
Social Research Centre (2008) ANZ Survey of Adult Financial Literacy in Australia: Final Report. Melbourne: ANZ Bank.Google Scholar
Staigler, D. Stock, J. (1997) Instrumental Variables Regression with Weak Instruments. Econometrica 65: 557–586.CrossRefGoogle Scholar
Stango, V. Zinman, J. (2011) Fuzzy Math, Disclosure Regulation and Credit Market Outcomes: Evidence from Truth in Lending Reform. Review of Financial Studies 24: 506–534.Google Scholar
Van Rooij, M., Lusardi, A. Alessie, R. (2011a) Financial Literacy and Stock Market Participation. Journal of Financial Economics 101: 449–472.CrossRefGoogle Scholar
Van Rooij, M., Lusardi, A. Alessie, R. (2011b) Financial Literacy and Retirement Planning in the Netherlands. Journal of Economic Psychology 32: 593–608.Google Scholar
Weiner, R., Baron-Donovan, C., Gross, K. Block-Leib, S. (2005) Debtor Education, Financial Literacy and Pending Bankruptcy Education. Behavioural Sciences and the Law 23: 347–366.Google Scholar
White, H. (1980) A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity. Econometrica 48: 817–838.CrossRefGoogle Scholar
Wooldridge, J. (2010) Econometric Analysis of Cross Section and Panel Data, 2nd ed. Cambridge, MA: The MIT Press.Google Scholar