Abstract
In this survey, we review the voluminous body of literature on the measurement and the determinants of financial literacy. Wherever possible, we supplement existing findings with recent descriptive evidence of German households’ financial literacy levels based on the novel Panel on Household Finances dataset, a large-scale survey administered by the Deutsche Bundesbank and representative of the financial situation of households in Germany. Prior research not only documents generally low levels of financial literacy but also finds large heterogeneity in financial literacy across the population, suggesting that economically vulnerable groups are placed at further disadvantage by their lack of financial knowledge. In addition, we assess the literature evaluating financial education as a means to improve financial literacy and financial behavior. Our survey suggests that the evidence with respect to the effectiveness of the programs is rather disappointing. We also review the role of individuals’ financial literacy for the use of professional financial advice and assess whether expert intervention can serve as a substitute to financial literacy. We conclude by discussing several directions for future research.
Highlights
In recent years, consumers across the globe have taken on greater responsibility with regards to their personal financial well-being
Since we cannot do justice to the large number of financial education programs initiated around the world, we focus on initiatives carried out in German-speaking countries (Panel A) and extend this sample by selected programs in other countries arguably most relevant for previous research on financial literacy (Panel B)
Proposed as a starting point to measure financial literacy, Lusardi and Mitchell (2008) have developed a parsimonious set of three questions related to financial literacy which have become known as the Big Three
Summary
Consumers across the globe have taken on greater responsibility with regards to their personal financial well-being. While this extreme risk aversion has always been a challenge to profitable asset management, the ongoing period of interest rates next to zero renders established savings patterns entirely ineffective and urges for new investment strategies to provide for retirement Taken together, these developments turn millions of German households into financial market participants, even though the vast majority have below-average experience as compared to individual investors in other economies like, e.g., the U.S with a long-term equity culture. In the U.S, Choi et al (2011) investigate contributions to 401(k) plans by employees who are eligible for an employer match and find that a large fraction of these employees either do not participate at all or contribute less than the amount required to be granted the full employer match, foregoing matching contributions which cumulate to substantial losses over time These and other findings in the literature have sparked public discussion pointing to a need for financial literacy in a world in which individuals shoulder greater personal financial responsibility.
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