When and How does Financial Literacy Really Matter?

The evidence on financial education has, to date, not been encouraging. As Cole and Zia write in Chapter 14, being financially literate clearly helps, but the value of financial education is a different question. We know the desired outcome (literacy) but not a reliable way to get there enough of the time, nor is it clear that literacy is enough. Behavioral economics teaches us that consumers also need ways to implement ideas, especially when temptations and distractions are difficult to keep at bay.

Intuition that improved financial decision making through training would have powerful effects is strong, and there’s some evidence in that line (e.g., Karlan and Valdivia 2011). So where exactly are existing financial literacy programs going off track? Is it curriculum? Is it delivery? Is it context? 

It’s plausible that financial literacy training is most effective when delivered just-in-time, but rarely are financial literacy training programs paired with quality financial products that make consumer choices meaningful. If a person understands compounding interest but cannot gain access to an interest-bearing savings account, such understanding can have little welfare impact. 

Still there should be situations where some measure of financial literacy should matter—for instance training on good financial management for shopkeepers. Drexler, Fischer and Schoar’s (2010) results indicate that impact is possible if we solve the curriculum, delivery and context puzzles. In their case, having simple rules of thumb were particularly valuable. Working with a microfinance institution in the Dominican Republic, they find that providing admonitions to take simple steps like separating business and personal accounts were more powerful than teaching a list of detailed financial concepts. 

The series has been compiledas a framing note on the FAI site and will be avilable later as part of a collection of studies to be published in a forthcoming book.