Getting financial literacy right

A number of years ago, I found myself, together with academic and economist Constantin Gurdgiev, in the back of a taxi, in Dublin with a US journalist.

We were spending the afternoon taking taxis at random, with the journalist asking the taxi his or her views and knowledge on various aspects of the financial crisis.

A piece subsequently appeared which noted that so bad was the financial mess we were in that taxi drivers were capable of discussing credit default swap pricing and credit ratings agencies. 

Fun and all as that was, it does highlight an issue which is important.

Financial literacy, that is to say the ability of people to understand financial concepts, is an important part of being a critical self-aware citizen consumer.

From the person opening up a bank account, through their decisions around whether and how much debt to take on, through to financial regulators and legislators, if we cannot understand the details of products, we are almost certainly going to come out on the wrong end of them.

We do not have good statistics from a reputable source on the extent of deep financial literacy in Ireland. Surveys have been carried out, but these have tended to be episodic. 

There is not, to my knowledge, a comprehensive CSO-style dataset on the extent of financial knowledge across cohorts of the population.

Financial literacy has been shown, in a large study by the World Bank, to be associated with much greater financial sophistication in adults. 

Those who are financially literate tend to hold a more balanced portfolio, tend to be more aware of issues around the need for proper pension planning, and tend to be more financially resilient.

Given that we as a society have just come through a massive crash, at least in part perhaps attributable to national financial illiteracy, we might want to ensure citizens are as financially literate as possible.

A really important finding from the US is that there is a non-linear relationship between low levels of financial literacy and the usage of high-cost products such as pawnbrokers or pay-day lending. 

Those who have the lowest levels of financial literacy are overwhelmingly more likely to use these kinds of products even when cheaper products are available to them.

A number of studies have also recently emerged which trace the childhood and young adult antecedents of financial literacy among adults. Studies also show a number of possible ways forward to improve general financial literacy.

Firstly, knowledge is power. The more people know about financial products, in terms of simply knowing the different types that are available, the more financially literate they become. 

In particular, knowledge about mortgages, how they operate and how they are priced tends to have quite significant effect on overall levels of mortgage delinquency. There is no magic bullet. Different cohorts require different types of interventions.

In fact, different individuals require different approaches. Some work better with simulations, others with games, others with audio visual. A wide variety of training and educational media is required. This is of course expensive.

In terms of what childhood traits are associated with financial literacy, a number of factors are beginning to emerge across studies. Increased financial literacy in adults is associated with being brought up in an urban setting, being born to parents who are financially more literate than their peers, having a higher quality of education, and having early exposure to financial products such as school bank accounts.

We can’t do much about where people are born, or to whom they are born, but we can encourage children to engage with financial products from an early age. Engaging with financial products comes about in two ways. A really important issue is that children have earned money. The second element is that this earned money is then saved or otherwise invested.

We need to encourage the banks and credit unions to go into schools and to open accounts. It would also be useful if the CSO was mandated and resourced to run annual surveys on financial literacy.


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