Financial Literacy, Financial Education and Downstream Financial Behaviors (full paper and web appendix)

Forthcoming in Management Science

103 Pages Posted: 2 Oct 2013 Last revised: 9 Jan 2014

Daniel Fernandes

Catholic University of Portugal

John G. Lynch Jr.

University of Colorado-Boulder, Leeds School of Business - Center for Research on Consumer Financial Decision Making

Richard G. Netemeyer

University of Virginia - McIntire School of Commerce

Date Written: January 6, 2014

Abstract

Policy makers have embraced financial education as a necessary antidote to the increasing complexity of consumers’ financial decisions over the last generation. We conduct a meta-analysis of the relationship of financial literacy and of financial education to financial behaviors in 168 papers covering 201 prior studies. We find that interventions to improve financial literacy explain only 0.1% of the variance in financial behaviors studied, with weaker effects in low-income samples. Like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention. Correlational studies that measure financial literacy find stronger associations with financial behaviors. We conduct three empirical studies and we find that the partial effects of financial literacy diminish dramatically when one controls for psychological traits that have been omitted in prior research or when one uses an instrument for financial literacy to control for omitted variables. Financial education as studied to date has serious limitations that have been masked by the apparently larger effects in correlational studies. We envisage a reduced role for financial education that is not elaborated or acted upon soon afterward. We suggest a real but narrower role for “just in time” financial education tied to specific behaviors it intends to help. We conclude with a discussion of the characteristics of behaviors that might affect the policy maker’s mix of financial education, choice architecture, and regulation as tools to help consumer financial behavior.

Keywords: Keywords: behavioral economics, household finance, consumer behavior, education systems, public policy, government programs, statistics, causal effects, design of experiments, meta-analysis, financial education, financial literacy

Suggested Citation

Fernandes, Daniel and Lynch, John G. and Netemeyer, Richard G., Financial Literacy, Financial Education and Downstream Financial Behaviors (full paper and web appendix) (January 6, 2014). Forthcoming in Management Science . Available at SSRN: https://ssrn.com/abstract=2333898

Daniel Fernandes (Contact Author)

Catholic University of Portugal ( email )

Palma de Cima
Lisboa, 1649-023
Portugal

John G. Lynch Jr.

University of Colorado-Boulder, Leeds School of Business - Center for Research on Consumer Financial Decision Making ( email )

Leeds School of Business
Boulder, CO 80309-0419
United States
919-971-5201 (Phone)

HOME PAGE: http://www.colorado.edu/business/john-g-lynch-jr

Richard G. Netemeyer

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

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