Context

In the US, concerns about individuals’ ability to manage their own financial affairs in the wake of the global financial crisis led to the creation of a Consumer Financial Protection Bureau (CFRB) in 2010. Among other responsibilities, the CFRB has been charged with promoting consumers’ financial literacy and identifying ‘what works’ in doing so.

This academic paper reviews the concept of financial literacy – how can it be defined and measured? – before examining the evidence on ‘what works’ from two perspectives:

1. Are higher levels of financial literacy associated with better economic outcomes – i.e. do higher levels of knowledge or skill help individuals to avoid problem debt, save money, accumulate wealth, or choose appropriate financial products?
2. How effective is financial education at increasing financial literacy?

Key findings

• Several studies have found a relationship between higher levels of financial literacy, when measured through tests or self-report, and better economic decisions, or outcomes – e.g. comparison shopping for loans, or paying bills on time. By contrast low levels of financial literacy are associated with negative behaviours and outcomes, such as high-cost borrowing and mortgage foreclosure.
• There is a lack of high quality evidence showing a (causal) relationship between financial education and financial literacy.
• The evidence of the impact of financial education on economic outcomes is mixed and inconclusive. Some studies have found that providing financial education is associated with better economic decisions and outcomes, while several high quality studies have found no relationship between the two.
• Research indicates that there are several potential roles for the government to play in improving financial outcomes for consumers. First, the government can help solve the public goods problems, which results in underinvestment in financial education. Second, the government can regulate the disclosure of fees and pricing. And third, the government can provide unbiased information and advice.

Recommendations

The report makes several recommendations concerning areas of interest for future research:

• Research might focus on understanding the financial competencies that individuals need. Similarly, we should understand when individuals are best able to make decisions on their own, or when an expert should be involved.
• Research could decide on whether a certain level of financial literacy is desirable, and if so, whether this should be tested for.
• Research could uncover the best measurement tool for financial literacy (e.g. best predictor of outcomes).
• Some attention might be given to whether numerical/cognitive ability is important in acquiring financial skills. Can these skills be learnt through study, or is personal experience necessary?
• Research needs to determine what the most effective (both impact and cost-wise) type of financial education is. We should aim to understand what the best delivery methodology is, and how we can reach the individuals that most need education.
• research can help us understand whether alternatives to financial education (e.g. automatic scheme enrolment) are as effective at improving financial outcomes.

Points to consider

• This is an unsystematic literature review that draws on evidence from quite different studies to draw conclusions about ‘what works.’ As such, it is possible that several relevant studies may have been overlooked, affecting how representative the review might be. Similarly, the composition of the included studies vary in their quality of data and approach, making ‘like for like’ comparisons difficult. Whilst the comparison does yield interesting findings, these limitations should be kept in mind when interpreting the study’s results.
• This review brings a range of research into financial literacy together in one place.
• The review considers research from a range of countries similar to the UK. However, the authors only go so far as interpreting these findings in an American context, meaning that UK readers will need to consider the local implications.
• This literature review will be of interest to anyone looking to get to grips with financial literacy. It contains an accessible and comprehensive introduction to related concepts and a good survey of related research.

Full report

NBER financial literacy, education and outcomes review - full report