LAUREN E. WILLIS, Loyola Law School Los Angeles
Email: Lauren.Willis@lls.edu

The dominant model of regulation in the United States for consumer credit, insurance, and investment products is disclosure and unfettered choice. As these products have become increasingly complex, consumers' inability to understand them has become increasingly apparent, and the consequences of this inability more dire. In response, policymakers have embraced financial literacy education as a necessary corollary to the disclosure model of regulation. This education is widely believed to turn consumers into "responsible" and "empowered" market players, motivated and competent to make financial decisions that increase their own welfare. The vision is of educated consumers handling their own credit, insurance, and retirement planning matters by confidently navigating the bountiful unrestricted marketplace.

Although the vision is seductive, promising both a free market and increased consumer welfare, the predicate belief in the effectiveness of financial literacy education lacks empirical support. Moreover, the belief is implausible, given the velocity of change in the financial marketplace, the gulf between current consumer skills and those needed to understand today's complex non-standardized financial products, the persistence of biases in financial decisionmaking, and the disparity between educators and financial services firms in resources with which to reach consumers.

Harboring this belief may be innocent, but it is not harmless; the pursuit of financial literacy poses costs that almost certainly swamp any benefits. For some consumers, financial education appears to increase confidence without improving ability, leading to worse decisions. When consumers find themselves in dire financial straits, the regulation through education model blames them for their plight, shaming them and deflecting calls for effective market regulation. Consumers generally do not serve as their own doctors and lawyers and for reasons of efficient division of labor alone, generally should not serve as their own financial experts. The search for effective financial literacy education should be replaced by a search for policies more conducive to good consumer financial outcomes.

MAARTEN VAN ROOIJ, Bank of the Netherlands - Research Department
Email: m.c.j.van.rooij@dnb.nl
ANNAMARIA LUSARDI, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
Email: annamaria.lusardi@dartmouth.edu
ROB ALESSIE, University of Utrecht - Utrecht School of Economics, Free University of Amsterdam - Department of Economics
Email: R.Alessie@econ.uu.nl

Individuals are increasingly put in charge of their financial security after retirement. Moreover, the supply of complex financial products has increased considerably over the years. However, we still have little or no information about whether individuals have the financial knowledge and skills to navigate this new financial environment. To better understand financial literacy and its relation to financial decision-making, we have devised two special modules for the DNB Household Survey. We have designed questions to measure numeracy and basic knowledge related to the working of inflation and interest rates, as well as questions to measure more advanced financial knowledge related to financial market instruments (stocks, bonds, and mutual funds). We evaluate the importance of financial literacy by studying its relation to the stock market: Are more financially knowledgeable individuals more likely to hold stocks? To assess the direction of causality, we make use of questions measuring financial knowledge before investing in the stock market. We find that, while the understanding of basic economic concepts related to inflation and interest rate compounding is far from perfect, it outperforms the limited knowledge of stocks and bonds, the concept of risk diversification, and the working of financial markets. We also find that the measurement of financial literacy is very sensitive to the wording of survey questions. This provides additional evidence for limited financial knowledge. Finally, we report evidence of an independent effect of financial literacy on stock market participation: Those who have low financial literacy are significantly less likely to invest in stocks.

IAN HATHAWAY, Federal Reserve Bank of Cleveland
Email: ihathaway@clev.frb.org
SAMEER KHATIWADA, Affiliation Unknown

In this paper we provide a comprehensive critical analysis of research that has investigated the impact of financial education programs on consumer financial behavior. In light of the evidence, we recommend that future programs be highly targeted towards a specific audience and area of financial activity (e.g. homeownership or credit card counseling, etc.), and that this training occurs just before the corresponding financial event (e.g. purchase of a home or use of a credit card, etc.). Similarly, in light of a lack of evidence, we also recommend that program evaluation be taken as an essential element of any program, and that it be included in the design of the programs before they are introduced.

LAUREN E. WILLIS, Loyola Law School Los Angeles
Email: Lauren.Willis@lls.edu

Financial literacy education has long been promoted as key to consumer financial well-being. Yet the claim has never had more than negligible statistically significant empirical support. This review (1) sets forth the model of financial literacy education underlying public support for these programs today, (2) identifies pervasive and serious limitations in existing empirical research used by policymakers as evidence of the effectiveness of this education, and (3) recommends a number of alternative public policies suggested by the existing research.

SEBASTIAN MÜLLER, University of Mannheim - Department of Business Administration and Finance, especially Banking
Email: mueller@bank.bwl.uni-mannheim .de
MARTIN WEBER, University of Mannheim - Department of Banking and Finance, Centre for Economic Policy Research (CEPR)
Email: weber@bank.bwl.uni-mannheim.de

Using data from an online survey with more than 3,000 mutual fund customers we construct a financial literacy score based on quiz-like statements. Our objective measure of financial literacy is significantly correlated with several socioeconomic and demographic variables. We also document a positive correlation between financial literacy and better than average (BTA) thinking in terms of investment skills. With respect to mutual fund investments, there is mixed evidence on the influence of financial literacy. While more sophisticated participants pay lower front-end loads, are less biased in their past return estimates and less miscalibrated in their return forecasts for their own fund as well as for the whole stock market, no relationship exists between financial literacy and ongoing fund expenses. Moreover, financial literacy has only a slight impact on the decision to buy a passive fund rather than an actively managed fund. Our results indicate that the lack of financial literacy among most mutual fund customers cannot completely explain the growth in actively managed funds over the past. The higher level of BTA among more sophisticated investors is modestly responsible for this finding.

ANNAMARIA LUSARDI, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
Email: annamaria.lusardi@dartmouth.edu

Individuals are increasingly in charge of their own financial security after retirement. But how well-equipped are individuals to make saving decisions; do they possess adequate financial literacy, are they informed about the most important components of saving plans, do they even plan for retirement? This paper shows that financial illiteracy is widespread among the U.S. population and particularly acute among specific demographic groups, such as those with low education, women, African-Americans, and Hispanics. Moreover, close to half of older workers do not know which type of pensions they have and the large majority of workers know little about the rules governing Social Security benefits. Notwithstanding the low levels of literacy that many individuals display, very few rely on the help of experts or financial advisors to make saving and investment decisions. Low literacy and lack of information affect the ability to save and to secure a comfortable retirement; ignorance about basic financial concepts can be linked to lack of retirement planning and lack of wealth. Financial education programs can help improve saving and financial decision-making, but much more can be done to improve the effectiveness of these programs.

BULY A. CARDAK, La Trobe University - Department of Economics and Finance
Email: b.cardak@latrobe.edu.au
ROGER WILKINS, University of Melbourne - Melbourne Institute of Applied Economic and Social Research
Email: rkw@unimelb.edu.au

We study the portfolio allocation decisions of Australian households using the relatively new Household Income and Labour Dynamics in Australia (HILDA) survey. We focus on household allocations to risky financial assets. Our empirical analysis considers a range of hypothesized determinants of these allocations. We find background risk factors posed by labour income uncertainty and health risk are important. Credit constraints and observed risk preferences play the expected role. A positive age gradient is identified for risky asset holdings and homeownership is associated with greater risky asset holdings. A unifying theme for many of our empirical findings is the important role played by financial awareness and knowledge in determining risky asset holdings. Many non-stockholding households appear to lack the experience and financial literacy that might enable them to benefit from direct investment in stocks.