Herman_Colloquium by fanzhongqing

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									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
Significance

 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
  decisions?
   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
    grow?”
    i) more than $102;
    ii) exactly $102;
    iii) less than $102;
    iv) don’t know (DK);
    v) refuse to answer.
Financial Literacy (II)
Inflation
“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+)
know?




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)
                             Responses

                 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
90.00%

80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%
         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
  (2007-2008)
  • Respondents are 23-27 years old
 How much do young people (ages 23-27)
               know?
 Distribution of Responses to Financial Literacy Questions (%)

                                     Responses

                    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
 90.00%

 80.00%

 70.00%

 60.00%

 50.00%

 40.00%

 30.00%

 20.00%

 10.00%

 0.00%
          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
      50%


      45%


      40%


      35%


      30%


      25%


      20%


      15%


      10%


       5%


       0%
                     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?
  35




  30




  25




  20




  15




  10




   5




   0
       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
                    Literacy
  On a scale of 1(very low) to 7 (very high), how would you assess
    your overall financial knowledge?

35%
                                                                            Male
30%
                                                                            Female
25%
20%
15%
10%
5%
0%
      1 = Ver y l ow   2   3   4     5       6    7 = Ver y Hi gh   Do not know   Pr ef er not to
                                                                                    answer
              People who make errors have “difficulties
                         paying off debt.”
                                               Grossly underestimate compounding
Percentage with "too much debt"




                                  40%
                                  35%
                                  30%
                                  25%
                                  20%
                                  15%
                                  10%
                                  5%
                                  0%
                                        < 2 years < 5 years   5-10    > 10 yr   Don't   Refuse
                                                  (correct)   years   (wildly   know
                                                                      wrong)
                                                     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
    saving?”
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:
 Tried
 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
planning
 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
  literacy
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
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                                                               Provided by Annamaria Lusardi, Economics,
                                                                                  and
                                                                          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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