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«FIVE STEPS TO PLANNING SUCCESS. EXPERIMENTAL EVIDENCE FROM U.S. HOUSEHOLDS Aileen Heinberg, Angela Hung, Arie Kapteyn, Annamaria Lusardi, Anya ...»

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Aileen Heinberg, Angela Hung, Arie Kapteyn, Annamaria Lusardi,

Anya Savikhin Samek, and Joanne Yoong

WP 2014-2

May 31, 2014

GFLEC Working Paper Series











Aileen Heinberg

Angela Hung

Arie Kapteyn

Annamaria Lusardi

Anya Savikhin Samek Joanne Yoong May 31, 2014 While financial knowledge has been linked to improved financial behavior, there is little consensus on the value of financial education, in part because rigorous evaluation of various programs has yielded mixed results. However, given the heterogeneity of financial education programs in the literature, focusing on “generic” financial education can be inappropriate and even misleading. Lusardi (2009) and others argue that pedagogy and delivery matter significantly. In this paper, we design and field a low-cost, easily-replicable financial education program called “Five Steps,” covering five basic financial planning concepts that relate to retirement. We conduct a field experiment to evaluate the overall impact of “Five Steps” on a probability sample of the American population. In different treatment arms, we quantify the relative impact of delivering the program through video and narrative formats. Our results show that short videos and narratives (each takes about three minutes) have sizable short-run effects on objective measures of respondent knowledge. Moreover, keeping informational content relatively constant, format has significant effects on other psychological levers of behavioral change: effects on motivation and self-efficacy are significantly higher when videos are used, which ultimately influences knowledge acquisition. Follow-up tests of respondents’ knowledge approximately eight months after the interventions suggest that between one-quarter and onethird of the knowledge gain and about one-fifth of the self-efficacy gains persist. Thus, this simple program has effects both in the short run and medium run.

Acknowledgements The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Financial Literacy Research Consortium. The authors thank Bart Orriens and Bas Weerman for help with the data, and Phil Martin and participants of the conference “New Insights and Advances in Financial Literacy: Translation, Dissemination, Change,” Washington, DC, November 18–19, 2010, for suggestions and comments. The opinions and conclusions expressed herein are solely those of the authors and do not represent the opinions or policy of SSA, or any institution with which the authors are affiliated.

1. Introduction In the United States, individuals are increasingly being asked to be in charge of their financial security throughout their lifetime and after retirement. Despite this shift to individual responsibility, many workers are not planning for their retirement (Lusardi, 1999; Lusardi and Beeler, 2007; and Lusardi and Mitchell, 2007, 2009, 2011a,b). Multiple streams of research have linked financial knowledge to better retirement planning and successful wealth accumulation (Lusardi and Mitchell, 2007, 2009, 2011a; Hung et al., 2009; Stango and Zinman, 2009), and a growing body of evidence strongly suggests that the causality runs from financial literacy to behavior rather than the other way around (Lusardi and Mitchell, 2014). While financial knowledge has been convincingly linked to improved financial behavior, basic understanding of economics and finance remains low both among the general population and across age, income, and education levels (Hung, Parker and Yoong, 2009; Lusardi, Mitchell, and Curto, 2010;

Lusardi and Mitchell, 2014).

There is, however, little consensus on the value of financial education, in part because comparative assessment of the gamut of existing programs has yielded mixed results. There is considerable variation in methodology and program types across studies, and, as Lusardi (2008,

2009) and others have argued, pedagogy, intensity, and format may matter significantly in explaining different findings. A key next step is therefore to move beyond a potentially misleading discussion of whether “generic” financial education works, toward an understanding of how to make financial education work through better design and appropriate delivery methods. Bernheim and Garrett (2003) and Bayer, Bernheim, and Scholz (2009) show that programs that only distribute printed material such as newsletters have little effect on participation in retirement savings plans. Duflo and Saez (2003) find relatively small impact from a one-time retirement benefits fair, while both Clark and D’Ambrosio (2008) and Bernheim and Garrett (2003) find some effects on behavior when employers offer single or occasional retirement seminars. However, when seminars are frequent, participation in retirement savings plans does significantly increase (Bernheim and Garrett, 2003). Lusardi and Mitchell (2009) and Bernheim, Garrett, and Maki (2001) find evidence that financial education courses that are a mandated part of formal high school curricula lead to more savings and better retirement planning outcomes in later life. While there is little doubt that financial education done properly can work, the issue of cost-effectiveness remains: with these relatively traditional delivery models, there is a clear tradeoff between efficacy and ease of implementation: Intensive interactive programs are more costly in terms of money and time, may not scale easily, may not be easily accessible by a wider audience and often by design appeal to only a small target demographic.

In this paper, we contribute to resolving this important issue by designing and experimentally evaluating a financial education program called Five Steps that draws on insights from psychology to more effectively deliver information about five core concepts underlying financial planning for retirement. A thriving literature in this field demonstrates the power of behavioral economics to affect households’ financial decisions.

Benartzi and Thaler (2004) and Ashraf, Karlan, and Yin (2009) build on inertia and the desire for precommitment to design more effective savings products, while Bertrand et al. (2010) use principles of persuasive advertising to motivate a series of advertising content treatments promoting the take-up of consumer credit.

We apply the same approach to financial education: Five Steps was explicitly developed using psychological principles to increase appeal and motivate behavioral change, while keeping to a format suitable for easy, low-cost replication and mass dissemination.

We use a field experiment to evaluate the overall impact of Five Steps on a probability sample of the American population. In different treatment arms, we quantify the relative impact of delivering the program through video and narrative formats. The results of the paper demonstrate the effectiveness of using simple precepts from psychology and marketing to enhance financial education and the need to take seriously features of program design and delivery beyond simply informative factual content.

The rest of the paper proceeds as follows. Section II describes the economic and psychological theory behind the development of the Five Steps program and the intervention itself, and a conceptual framework for evaluating the effects of the program. Section III details the experimental approach used to evaluate the program. Section IV presents the results of intervention. Section V considers how much of the effects remain in a follow-up test some eight months after the intervention. Section VI discusses implications for future work and concludes.

II. Conceptual Framework and Program Development

The effectiveness of a financial education program is normally judged on two levels: whether a program successfully conveys information to its target audience and whether it ultimately leads to behavioral change. In this paper, we focus on the former, but we also consider changes in hypothetical behavior.

Although the financial education literature often recognizes that financial education is a choice made by individuals, the decision processes behind knowledge acquisition are not often studied in great depth. Exposing an individual to a financial education program is by no means a guarantee of take-up—either in terms of actual program participation or (in the case of programs that are mandatory) actual learning conditional on participation. Meier and Sprenger (2013) argue that knowledge is a form of investment, the value of which lies in a positive excess return from financial investing, and that consumers make the decision to participate in financial education based on their perception of this return. Similarly, Delavande, Rohwedder, and Willis (2008) and Lusardi, Michaud, and Mitchell (2013) model the returns to financial knowledge as a higher expected return on financial assets, with the cost of acquiring knowledge being a function of explicit payment and other factors, including inherent cognitive ability and effort.

Consider the following very simple conceptual framework: suppose that an individual has to exert effort e to gain financial knowledge k, such that the amount of knowledge gained k(e) and cost of effort c(e) are both increasing in e. The expected return to knowledge is E[U (k)] where U is also increasing in k. The net expected gain from expending effort is thus E[U(k(e))] – c(e).

Under standard assumptions about U, an individual will expend effort on financial education until the expected marginal return from the investment in knowledge is equal to the marginal cost of effort of acquiring that knowledge; i.e., E[U’(k) k’(e*)] = c’(e*).

This simple formulation illustrates three possible ways to make a program more effective for users, in the sense of ultimately increasing the optimal choice of knowledge k(e*).

First, a program should be informative, by providing a high marginal return in terms of knowledge gains to a given amount of effort; k’(e) should be large.

Secondly, it should be accessible to the users, i.e., have a low marginal cost to a given amount of effort; c’(e) should be small. We note that this is not only in terms of explicit payment, but also in terms of disutility—programs that are more inherently enjoyable to experience may ultimately lead to more knowledge gain.

Finally, it should be motivational, i.e., by increasing the returns from acquiring a given amount of knowledge; U’(k) should be large. Choosing to deliver knowledge that is highly relevant to individuals (and hence has the potential to provide high returns) should itself be implicitly motivating. However, in practice, the degree of ex-ante awareness among potential participants may not be sufficient. Behavioral economics suggests that motivation can be manipulated in multiple ways. For instance the program can

incentivize participants by making utility gains more salient or more easily achievable:

educating participants about the true benefits of financial knowledge or even providing direct financial incentives. In their study of advertising campaigns, Bertrand et al. (2010) argue that such effects can also take place through manipulating reference points or cues that increase the marginal utility of consumption, or by biasing other key decision parameters through manipulation of intuitive and/or deliberative cognitive processes, for instance verbally framing a program or including specific visual images that evoke a particular emotional response.

We have designed specific features of a financial education intervention with these three dimensions in mind, as described below.

II.A. Selecting Informative Content To ensure that the program is highly informative and likely to result in large benefits to a broad share of the population, we focused the content on five core concepts that underlie successful retirement planning that have previously been identified in the literature as important, persistent basic knowledge gaps (Lusardi and Mitchell, 2014). The literature also suggests that behavioral factors contribute to these gaps. Taking behavioral factors into account, our program aims to improve understanding of the following five core concepts.

Compound interest:

Understanding the difference between simple and compound interest, and how quickly interest accumulates can help individuals both appreciate the importance of starting to save early and the dangers of borrowing at very high interest rates. However, people seem to know little about interest compounding (Lusardi, 2012; Lusardi and Mitchell, 2014; Lusardi and Tufano, 2009a, 2009b). Moreover, in what has been termed future value bias (Stango and Zinman, 2009), people tend to underestimate how quickly compound interest grows. This is a case of the more general exponential growth bias, in which people underestimate the growth of functions with exponential terms. This bias is strongly correlated with savings, portfolio choices, net worth, and other measures of personal finances.


Individuals need to understand the potential reduction in purchasing power over time due to inflation in order to assess saving and borrowing decisions in real rather than nominal terms. This is particularly important given the long horizons typical in planning for retirement. There seems to be little knowledge of the workings of inflation (Lusardi and Mitchell, 2014). Behavioral research also documents money illusion: people tend to think in terms of nominal rather than real monetary values, insufficiently taking into account the impact of inflation (Shafir, Diamond, and Tversky, 1997).

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