Presentation to the 2010 IFIE/IOSCO Investor Education Conference

1. Presentation to the 2010 IFIE/IOSCO Investor Education Conference Emerging Best Practice: Using the Best Thinking and Tools to Improve the Effectiveness of Investor Education Annamaria Lusardi, Dartmouth College and The George Washington School of Business November 8-9, 2010

2. Relevance A new economic landscape • Individuals are increasingly in charge of their financial well-being • Changes in the pension landscape • More individual accounts • Changes in the labor markets • Increased mobility • Changes in the financial markets • Increased complexity

3. The “great risk shift” • How well-equipped are people to make these decisions and what can financial education do?

4. Financial education Critical role of financial education • Levels of financial literacy are very low in both developed and developing countries • Financial education is essential but faces many barriers • Costs • Benefits tend to be in the long run • Evaluation and effectiveness

5. Measuring Financial Literacy (I) To test numeracy and understanding of interest rates, we asked: “Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?” i) more than $102; ii) exactly $102; iii) less than $102; iv) don’t know (DK); v) refuse to answer.

6. Measuring Financial Literacy (II) To test understanding of inflation, we asked: “Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy:” i) more than today with the money in this account; ii) exactly the same as; iii) less than today iv) DK; v) refuse.

7. Measuring Financial Literacy (III) Finally, to test understanding of risk diversification, we asked: “Do you think the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.” i) true; ii) false; iii) DK; iv) Refuse.

8. US National Financial Capability Study The 2009 National Financial Capability Study includes three linked surveys: • National Survey: Nationally-projectable telephone survey of 1,488 American adults • State-by-State Survey: Online survey of approximately 25,000 respondents (roughly 500 per state + DC) • Military Survey: Online survey of 800 military personnel and spouses

9. How much do Americans know? Distribution of responses across the US population Distribution of Responses to Financial Literacy Questions (%) NB: Only30%correctly answer all 3 questions correctly; less than half (46%)got the first two questions right.

10. Financial Literacy around the World (FLat World) These questions have been added to national surveys in: • Germany • The Netherlands • Italy • Sweden • Japan • New Zealand • Russia • India Findings are similar or worse than in the United States

11. Linking Financial Literacy to Behavior • Debt and debt management • Investments • Planning and wealth accumulation

12. Financial literacy and mortgages • Studies show that those with low literacy are more likely to take up high cost mortgages • Those with low education are less likely to refinance mortgages during a period of falling interest rates

13. Lessons learned Critical role of financial education • Financial decisions are interrelated • Cannot focus on investment or asset building only • Limitations of disclosure and regulation • Individuals do not read or understand financial matters • One size does not fit all

14. Some suggestions • “How to increase the effectiveness of financial education and saving programs”.

15. Ideal venues to provide education Where to provide financial education • Employer-provided financial education • Most people are at work • Financial education in school • Most young people are in school • We need education before individuals engage in financial contracts • Financial education by the Treasury/Central bank/Regulatory authority • Interest in good functioning of financial markets

16. How to help people in making financial decisions • The Dartmouth Project • Simplify financial decisions • Provide information when needed by individuals • Target specific groups • Use communication that does not rely on figures and numeracy

17. The Dartmouth Project: Planning Aid Together with Punam Keller, I designed a planning aid intended to help college staff enroll in the college supplementary retirement account (SRA)

18. The Dartmouth Project: Planning Aid Most people plan on electing a supplemental retirement account, but feel they don’t have the time or information right now. We have outlined 7 simple steps to help you complete the election process. It will take between 15 – 30 minutes, from start to finish. It will take less time for you to start to insure your future than it takes you to unload your dishwasher! Don’t give up! Contact the Benefits Office (6-3588) if for any reason you could not complete the online application. It takes no time to prepare for your lifetime!

19. In their own words : Four stories • Ron Whitcomb works in Facilities Operations & Management's Custodial Services. He has been with the College for fourteen years. Topics discussed: • Hopes for Retirement • Parents as Role Models • Why I Save • Ron's Recommendations • Planning for the Future

20. Program Effectiveness There was a large increase in savings enrollment within 30 and 60 days of hiring among participants who received the brochure

21. Provide good “nudges” Simple behavioral changes by employers can help: • Automatically enroll workers into pensions at a set contribution rate and allocate their money into a life-cycle fund • Develop default options for other products as well • Add financial literacy to default options

22. Simplification and communication • Simplify decision-making • Use simple communication methods • As simple as a traffic light (chapter 4)

23. Financial education in school Chapter 9 shows that the small proportion of young people (7%) who are financially knowledgeable are Male White From college educated families U.S. Financial literacy challenge: Test to measure financial knowledge in participating schools Programme for International Student Assessement (PISA) Measure financial literacy among 15-years old in 19 countries in 2012

24. More on Financial education Link financial education to other programs Entrepreneurship Take into consideration different ways of learning Videogames Be realistic about outcomes A one-time retirement seminar does not transform individuals into “investment wizards”

25. Video game: Celebrity Calamity • Project with Doorways to Dreams (founder is from Harvard Business School)

26. The Saving Pyramid

27. Learning from other countries (chap 13) Financial literacy web-site: A reliable, independent, and expert source of information • Example: New Zealand’s Sorted http://www.sorted.org.nz/ • New web site in the US: mymoney.gov http://www.mymoney.gov/

28. Concluding comments Financial literacy is a necessary skill, like reading and writing • Need to equip individual with tools to make decisions - Individuals make many financial decisions and these decisions are interrelated • Costs of financial illiteracy at both the individual and macro level