Herman_Colloquium by fanzhongqing


									Gender and Financial Literacy: How Much
          Do Women Know?

   Presentation to the Herman Colloquium
           University of Michigan
             November 3, 2008

            Annamaria Lusardi
        Dartmouth College & NBER

 This paper is part of a larger research project
  on financial literacy

 Individuals are increasingly in charge of
  making saving and investment decisions
   Changes in the pension landscape

 Are people well-equipped to make these
   NO!
How do women fare?

 Women have specific needs
  Women live longer than men, thus savings need
   to last a long time
  Because of shorter labor market tenures, women
   are less likely to have pensions or have less
   experience with pensions.

 Women are a vulnerable group
  Death of a spouse often precipitate women into
   poverty (Willis and Weir, 2000)
How much do people know and does
knowledge matter?

Olivia Mitchell (Wharton School) and I devised a module on
Financial Literacy & Planning for the 2004 Health and
Retirement Study (HRS)

Financial     Literacy
    -   Do women know basic economics/finance?

   Planning
    -Do women calculate how much they need to save
    for retirement? How well do they plan?
Measuring Financial Literacy: (I)
Interest Rate/Numeracy
“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
    i) more than $102;
    ii) exactly $102;
    iii) less than $102;
    iv) don’t know (DK);
    v) refuse to answer.
Financial Literacy (II)
“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.
Financial Literacy (III)

Risk Diversification
“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.
How much do older people (ages 50+)

NB: Only ONE THIRD (34%) correctly answer all 3 questions;
only around HALF (56%) correctly answer Inflation &
Compound Interest.
Financial Literacy among older women (50+)
(HRS module, N= 785)

                 Correct   Incorrect    DK     Refuse
Interest rate    61.9%      24.7%      11.6%   1.8%

Inflation        70.6%      14.5%      12.8%   2.1%

Risk diversif.   47.6%      12.0%      39.6%   0.8%
Correct responses: By Gender









         Compound Interest   Inflation   Stock risk
Male          74.70%         82.20%       59.30%
Female        61.90%         70.50%       47.50%
Financial literacy among the young

 These questions have now been added to
  many other surveys in the US and abroad

 Evidence on financial literacy from wave 11
  of the National Longitudinal Survey of Youth
  • Respondents are 23-27 years old
 How much do young people (ages 23-27)
 Distribution of Responses to Financial Literacy Questions (%)


                    Correct       Incorrect         DK           Refuse
Interest rate     79.24          14.76          5.87         0.12
Inflation         53.88          30.53          15.41        0.18

Risk diversif. 46.57             15.86          37.5         0.07
  NB: Only LESS THAN HALF (45%) correctly answer all 3
  questions; only around TWO THIRDS (60%) correctly answer at
  least two questions.
Correct responses: By Gender









          interest rate   Inflation   Stock risk
 Male       81.79%        59.98%       53.29%
 Female     76.61%        47.57%       39.62%
Knowledge or cognition?

 Use data on test score (ASVAB – Armed
  Services Vocational Aptitudes) in the NLSY

 Gender differences still exist even after
  accounting for test scores
Gender Differences in Debt Literacy

 Together with Peter Tufano (HBS), I
  designed questions about debt literacy

 We engaged a market research firm (TNS) to
  provide timely data
   TNS is leader firm in opinion polling
   Representative sample of US population
More on the power of interest compounding (TNS)

Suppose you owe $1,000 on your credit card and the
interest rate you are charged is 20% per year
compounded annually. If you didn’t pay anything off, at
this interest rate, how many years would it take for the
amount you owe to double?
     - 2 years              Interest compounding        Percent
     - Under 5 years        2 years                         9.6
     - 5 to 10 years        Less than 5 years (correct)    35.9
                            5 to 10 years                  18.8
     - More than 10 years More than 10 years               13.1
     - Do not know          Do not know                    18.2
                            No answer                       4.3
     - Prefer not to answer
Paying off credit card debt

Suppose you owe $3,000 on your credit card. You pay a
minimum payment of $30 each month. At an Annual
Percentage Rate of 12% (or 1% per month), how many
years would it take to eliminate your credit card debt if you
made no additional new charges?
    -   Less than 5 years         Credit card payment     Percent
    -   Between 5 and 10 years    Less than 5 years           3.8
    -   Between 10 and 15 years   Between 5 & 10 years       12.4
    -   Never,                    Between 10 & 15 years      21.6
    -   Do not know               Never (correct)            35.4
                                  Do not know                21.7
    -   Prefer not to answer
                                  No answer                   5.1
Who has lower debt literacy? Differences
between men and women
  Percent answering credit card question correctly or “do not know” by gender










                     Correct answer                   Do not know
                                      Male   Female
Measuring Financial Literacy

 On a scale of 1(very low) to 7 (very high), how would
  you assess your overall financial knowledge?







       1 (very low)   2   3        4   5      6    7 (very high)   Do not know   Do not answer

       Very low               Medium       Very high
      Gender Differences in Self-Reported
  On a scale of 1(very low) to 7 (very high), how would you assess
    your overall financial knowledge?

      1 = Ver y l ow   2   3   4     5       6    7 = Ver y Hi gh   Do not know   Pr ef er not to
              People who make errors have “difficulties
                         paying off debt.”
                                               Grossly underestimate compounding
Percentage with "too much debt"

                                        < 2 years < 5 years   5-10    > 10 yr   Don't   Refuse
                                                  (correct)   years   (wildly   know
                                                     How long to double debt at 20%?
3 questions on Retirement Planning

Trying to plan
    “Have you ever tried to figure out how much your
    household would need to save for retirement?”
Developing a plan
    “Have you developed a plan for retirement
Sticking to the plan
    “How often have you been able to stick to this
    plan? Would you say:”
    i) always; ii) mostly; iii) rarely; or iv) never?
What we find:
 Have you ever tried to figure out how much your
 household would need to save for retirement?
    Yes (30.9%)                No (68.2%)
 Developed a plan
 Have you developed a plan for retirement saving?
      Yes (58.5%)       More or Less (7.3%)    No (34.2%)

 Stuck to the plan
 How often have you been able to stick to the plan?
  Always (31.8%)    Mostly (53.9%)        Rarely 9.1 Never 3.2.%
Retirement Planners

Question                                     Proportion

Simple Planners                               30.9%
Tried to figure out how much to save (yes)
Serious Planners                              20.3%
Developed a plan (yes/more or less)
Committed Planners                            17.4%
Able to stick to plan (always/mostly)
Does financial literacy matter?

 Are the more financially literate
 women :
 more likely to plan?
 more likely to succeed in planning?
Probit Analysis of Simple, Serious, and Committed Planners :
Accounting for Differences in Demographic Characteristics

                                   Simple         Serious        Committed
                                  Planners        Planners        Planners
Correct on Interest Rate        .014 (.042)     .003 (.032)     -.001 (.029)

Correct on Inflation            .065 (.045)     .029 (.036)     .028 (.032)

Correct on Risk Diversificat.   .095 (.05)*     .093 (.042)**   .061 (.038)*

DK Interest Rate                -.182 (.05)**   -.122 (.043)*   -.100 (.038)*

DK Inflation                    .054 (.094)     .021 (.078)     .050 (.079)

DK Risk Diversification         -0.056 (.055)   -.037 (.045)    -.045 (.040)
Pseudo R2                       .123            .139            .144
The relationship between literacy and
 We address reverse causality in another paper
  using financial literacy in the distant past as an
  instrument for current literacy.

 We find similar results in another paper: “Baby
  Boomer Retirement Security: The Roles of Planning,
  Financial Literacy and Housing Wealth” (JME, 2007)
  which uses different measures of planning and
  financial literacy.
Financial Literacy Initiative

 Work with US Treasury/FINRA to design a
  survey on financial capability

 Started a project at Dartmouth to help
  employees make saving decisions

 Write a blog dedicated exclusively to financial
What to do given widespread illiteracy?

 The Dartmouth Project
  •   Simplify financial decision
  •   Provide information and advice
  •   Target specific groups
  •   Use communication that does not rely on figures
      and numeracy
Don’t give up! Contact the Benefits Office (6-3588) if for any
    reason you could not complete the online application.

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Most people plan on electing a supplemental retirement account, but feel they don’t
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Obstacles to Opening a Supplemental
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                             I can’t afford

     Don’t know how to use                    I do not know how
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  Few people like
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     me do it.
                                              unexpected expenses

Don’t know where                                             I do not have a
    to put $$                                                   computer

I have no time                                                     My debt is too
now                                                                 expensive

     Solutions to Opening a Supplemental
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                                     You can start with
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Make an investment selection now.                            HR and the library
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  Start early & your                                                     you will save even
 money will grow fast                                                           more

                                                               Provided by Annamaria Lusardi, Economics,
                                                                          Punam Anand Keller,
                                                                        Tuck School of Business,
                                                                         in conjunction with the
                                                                       Retirement Savings Study.
More on Financial Literacy
 Other papers I have written on this topic are
  available on my web pages:
   http://www.dartmouth.edu/~alusardi

 I edited a book “Overcoming the saving slump:
  How to increase the effectiveness of financial
  education and saving programs” for the
  University of Chicago Press that discusses these
  topics at length.

 Initiative in progress dedicated to women

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