Episode 66: The Social Science of Financial Literacy with Dr. Annamaria Lusardi

7:04PM Mar 5, 2025

Speakers:

Dr. Ian Anson

Dr. Annamaria Lusardi

Keywords:

Financial literacy

personal finance

financial education

financial decisions

financial knowledge

financial markets

financial stability

financial education in schools

financial literacy survey

financial literacy policy

financial literacy impact

financial literacy statistics

financial literacy programs

financial literacy challenges

financial literacy research.

Hello and welcome to Retrieving the Social Sciences, a production of the Center for Social Science Scholarship. I'm your host, Ian Anson, Associate Professor of Political Science here at UMBC.

On today's show, as always, we'll be hearing from UMBC faculty, students, visiting speakers, and community partners about the social science research they've been performing in recent times. Qualitative, quantitative, applied, empirical, normative. On Retrieving the Social Sciences we bring the best of UMBC's social science community to you.

As all teachers know, class time can have its ups and its downs. Sometimes I leave my classroom feeling like my students really got what I wanted them to learn. Walking back to my office feels like a victory lap. Other times I wonder how I could have been so foolish to even attempt the lesson plan that I had put together. The return trip to my office in that case, becomes a miserable slog. But there are also times when students take what I had intended to teach way, way off the rails, and then we all end up learning more than we had anticipated.

That is exactly what happened a few years ago in my introduction to American politics course, my students, who were mostly in their first year of college, were learning about public policy, specifically federal taxes and spending. Going off on one of my usual tangents. I was explaining how, under current law, income tax brackets for wages and salaries are not the same as the brackets for investment income. I was explaining that as people's stock portfolios grow, they're taxed on realized gains, but for most investors, that tax burden is surprisingly low, and this has, of course, lots of political implications, yada yada yada. And that's when a student's hand shot up. Professor Anson, do you invest in the stock market?

I paused, not really sure how to respond. Another student chimed in, you said that people are making like, a lot of money this way. How do you do it?

That's when I knew that the day's lesson was about to turn into something much different than I had anticipated. It turned out that a lot of students in my class were earnestly seeking basic information about how to handle their own money. Now, let's be clear, I'm not an economist or a CPA or a financial advisor, but I do know a few things about compound interest and the time value of money. According to Albert Einstein, my class was suddenly talking about the most powerful force in the universe, and yet most of my college students had barely discussed it with any trustworthy source before. Now, when I teach American politics, I devote a whole class session to personal finance. Would it surprise you if I told you that that class is at peak levels of engagement on that particular day of the semester? Today, I'm delighted to bring you a rebroadcast of a recent UMBC event that sheds far more light on the issue of financial literacy than I ever could. In 2025 UMBC welcomed Dr. Annamaria Lusardi to campus to deliver the annual Mullen lecture sponsored by the Center for Social Science Scholarship and the UMBC Department of Economics.

Dr. Lusardi is Senior Fellow at the Stanford Institute for Economic Policy Research, Director of the Initiative and for Financial Decision Making, and Professor by Courtesy of the Stanford Graduate School of Business. Dr. Lusardi's remarks take up the question of financial literacy among ordinary people around the world. In the talk, we learn about how much people know about personal finance, who is most vulnerable to economic predations due to their lack of financial literacy, and what we can do about it. Let's jump in right now.

Thank you very much. I'm really excited to be here, and I want to say, first of all, thank you, not only for inviting me for all of the students here. You know, if there is a personal finance course or a financial financial literacy course of your year, do take it. It's going to transform your life. Okay, so this is how I think important and impactful personal finance courses are. And the reason for I'm actually going to give you a tour, tour of data collection, but I'll try to make it as light as possible, and because it's so much data, I'm going to stop at several point and kind of to discuss that with you, and also make sure you know when you have a question that just raise your hands and we'll, you know, We'll, we'll discuss it together. I just want to start with why we are talking about financial literacy today, or why are we talking so much about financial literacy today, and also give what is it, I think, the main point of this presentation, but the reason why we are talking about. National Literacy has not to do with crisis, or not to do with the fact that inflation has gone up and so on. Has not to do with the fact that the world has changed, and has changed in a way that has made us responsible for so many financial decisions. One is certainly the pension. If any of you had even a part time job, I'm sure you had to deal with benefit, understanding, for one case, understanding all of this benefit, and it's very important, and they are complex, right? But it's not just that, not just changes in that part you there are changes, for example, in the labor markets, the importance of STEM. And I'm so proud to be here today, because I know that that's the university for really famous for STEM. And you know, congratulations, because that's certainly very important. My students at Stanford, they are all the large majority, they are into stems. Half of our students are actually in computer science. And the big change is also the changes in the financial markets, where there are so many new instrument and they are all complex, right? And some of them are one way in which you can increase your wealth greatly and destroy your wealth as well. And you know, just think of FinTech and AI. Now, money is invisible. With a click of a button, you can make important financial decisions, right? And yet again, this is why this is even more important. So the point I would like to make is that we need a scientific approach to financial literacy. In other words, we cannot just pretend that people know it okay. We cannot put people in charge of important and complex financial decision and not check how much they know about this and let them take information everywhere.

I always say financial literacy today is like reading and writing. Imagine you are an illiterate person. You cannot read and write, okay? You can be as clever as you want. You are not able to navigate this world, right? This world is complex, and you need skills. You need at the minimum to be able to read and write, and today, given the importance of finance and the type of decision we all have to make, we need this additional skill, right? Common knowledge, general knowledge, is not enough. And so what I would like to say, you know, we need first of all to have it in the school, and not just, you know, in the elementary or high school. We also need it at this higher level, at the college level, and we need it to be as rigorous as possible. So I am going to try to answer for question today, and I'm going to take a personal finance approach. I am underlying it because of the way I'm asking this question. If I were a macro economist, I would ask it differently, right? But these are the question I'm going to try to ask, ask and try to give an answer, which is, you know, given what I've said, you know, do people have the knowledge of this fundamental concept? In other words, do people know the APC of finance, right? Second is, how do they use it in their financial decision, right? Trying to basically ask the question, but does this knowledge matter? Right? You might not know physics and still be able to play pool, right? But in finance, ignorance is not bliss, okay? And I'm going to try to also show you what I've learned by looking at the data. And if this is the case, what can we do to really improve financial literacy and behavior? And as you can imagine, there is an important role that university can play here in terms of addressing this. Why is it a personal finance approach? If I were a macro economist, I will show you aggregate data and try to match that data, right? And instead, what I'm going to do here, I'm going to go through surveys that we have designed to see whether people know the ABC and I'm also going to try to look at this black box of how people make financial decision, right? Normally, we know output, we know savings, we know investing, we know what people do, but we don't know how they do it. So I want to enter this black box and also try to make some assessment. Are these good or bad decisions? Right? In person? Our finance, we can actually say more about this, and this is actually what I'm going to try to do. And given the study and given all this data and research we have done, I'm also going to then use these suggestions from that to try to do policy and programs and teaching, which is really evidence and database. So this is a, you know, to tell you why the data is so important and why I'm going to take you to a tour de force. So, you know, setting expectation about all of the data that we have been able to collect. And before I do so, let me just tell you that financial literacy now is an official field of study, right? So maybe 20 years ago, I don't think you know, I would have given a seminar on financial literacy, and probably the war in courses in financial literacy. But financial literacy is a field of study. We have a GL Code, a Journal of Economic Literature. Code is G 53 we have a journal dedicated to financial literacy. So if you study this topic, you have a place where to publish. And we also have all of the activity that every field has conferences dedicated to these sessions in conferences and so on. So finally, this has achieved this status, and we can also learn a lot from the research. As a consequence, also you can put financial literacy into a traditional model of savings. And this is actually what we did in a paper we published in the Journal of Political Economy. The reason, actually why I want to tell you briefly about this is just to tell you, in case some of you think like, you know, but does it really matter? We also did, in a sense, a simulation we wanted to understand. But how much does this knowledge matter? Right? Are we looking at something that you know as a small consequence in the aggregate, maybe it's big at the individual level, but only, you know, small part of the population. So much does it matter? But for the academics here, I also want you to say it's not that financial literacy is kind of, you know, something new, that you cannot fit in. In fact, financial literacy, you can put it in, into just the most basic inter temporal model of savings. We did this in this JP paper, and actually what we did is a very simple introduction of financial literacy. We said financial literacy help people basically invest their wealth, and in particularly, help people invest their wealth in the stock market, right? So it's like financial literacy, give you access to a better technology to invest, which is invest your wealth in the stock market, so you can get potentially a different return. It is higher but risky, right? So you have to take that risk into consideration. It's a very simple way, right? Financial Literacy does a lot more than by the way, affecting investment. But suppose that it only affects investment. How much does it matter? Okay? Well, we found that from 30 to 40% of wealth inequality close to retirement can actually be attributed to financial literacy. This is just to say that even if you take the most simple model and try to add financial literacy is not a side show, right? It actually is quite influential.

But let me now turn to some of the four questions I want you to address. Probably most of you don't write models, so let me start very basic and say, but do people know the ABC of personal finance? What I wanted to show you in this next slide are the three questions we have designed to measure financial

I'm not going to read them, but I would like you to take a moment to read them, because these are three questions we we Olivia Mitchell and I design more or less in 2000 they were first added to this module in 2004

when we basically face the question. But how much do people know? Olivia and I were both working on savings. That's why I started with the saving model and also looking at kind of pensions, no decision about the future. And we saw that people who are very similar on many characteristics end up, as I mentioned in the model, with vastly different amount of wealth at retirement. So we thought, could that be that financial literacy play a role? But we couldn't answer these questions because there was no data that provided financial literacy measure and also linked that financial literacy to behavior. So we. We set up to measure financial literacy. The question is, what do you ask to measure financial literacy, right? Do you ask these people, know, the Black Scholes formula to price, you know, convertible bonds, right? Or, you know, what is it that you ask? So when, when we set up to do this, we were told we only had three questions, and we pushed back. He said, No, we cannot measure financial literacy with three questions. He says, you only have three questions, right? That's a module, right? You just design three as a result, we spent one year designing these three questions. And if you think, Oh, my God, why did you come up with this, basically, we consulted a lot of expert and also in survey methodology. And I hope it is clear from the type of question we designed that we went for the most basic concept. The first question is the simplest one, and it's try to assess whether people can do an interest rate calculation right in the context of a financial decision. So again, sometime people write to me and said, Did you mean more, one or two, or did you mean one, 110, we really meant one or two. It wasn't a mistake that we didn't look at this. You know, we spent a year designing these questions, and it's because we wanted to see whether people are numerate interest compounding is actually a very complex concept. And if we had asked the question differently, we would have got, we would have gotten a very low percentage of correct answer. Also know, these are multiple choices. We don't ask people to, you know, do the calculation and give us an answer. You know, we we asked to choose one, and we also have the do not know, and they refuse to answer, so that people are not forced to pick an answer. Okay, the second question is about knowledge of inflation, and it's a joint test, or whether people know what inflation is, so we don't explain inflation and doubts, right? So it's a joint test of knowledge of finance and of this concept of inflation, because in finance, most of the decisions are about transferring some of money over time, but over time, prices change, right? So this is, of course, a question that has become more relevant today, given that inflation has gone up in the past few years. But this is again, supposed to be a little harder, and also this joint knowledge. The third one is the most difficult question is meant to measure risk diversification, and again, knowledge of whether people know what a stock and a stock mutual fund is right. Is again, testing the knowledge of finance, because finance is so complex that it has its own knowledge, right, its own language. And so nobody is going to explain to you that language you have to learn the language of finance. And this is actually what I tell when I start my personal finance course. We are going to learn the language of finance together, right? I don't know if you think these are easy or or hard, but you know, these were the question that we designed to measure the APC of personal finance. So even though three was an accident, right, we were forced to only have three questions. It turned out to be a great opportunity, because actually there is room for three questions in every survey around the world. And so after we did the first survey, the results were so striking that everybody wanted to basically add this question. So we have been adding them in countries around the world, which is really great, because we have learned enormously from that, as I'm going to show in a moment. And more recently, we indeed another international comparison as a special issue of the inaugural Journal of Financial Literacy and well being, where we could get the data from the same country. So we can see, does financial literacy change over time? And also we have a lot more new countries, and so we can learn even more. Okay, so the result are really sobering, which is that, unfortunately, financial literacy, even when we measure the ABC, is strikingly low, right? So you cannot take financial literacy for guarantee, even in the US, which is a country with, of course, advanced financial market, you cannot take it for granted. Even in Finland, which is a country with a very strong education system, you cannot take it for granted in country in the g7 right? And, of course, it's very low in the developing economies. But in fact, the results are strikingly similar. What is also similar is the group which are particularly vulnerable are the same. They are the young women and those with low education and income, and I'm going to come back to some of these later on. And the result, which is unfortunately, very discouraging, is that across. Countries, we don't see any improvement in financial literacy in most of the countries, right? So financial literacy sort of stuck at this low level. So in 2016 we partnered with the TIA Institute. This is the pension fund for the education industry, and they are a non for profit. And so we designed a question, which we call the personal finance index, where we now have questions about all the decisions that people make. So we really want to have a comprehensive measure of personal finance, and we collect the data each year, in January and each year, by the way, we added. Also, kind of, even though the 28 question that we design are going to be kept the same, we can add information so we can pass different hypotheses and so on. And each year, also we have over sample a specific group, so we can look at the specific group in the population. And also, more recently, we have a look at other topics as well, like retirement, fluency and things like this. As I mentioned, we have 28 questions. We are now unrestricted, and we went for it, right? So, so we have three or four questions for each of these topic. What are the topic? Well, we have used the Council for Economic Education, national standard for financial literacy. And so these are the topic that we think people, in a sense, make decision of, and we ask questions about each of them, right? So to measure, again, their personal finance knowledge, what do we ask? Here is the example of a question, right? So what you'll see is that we are asking whether people have an understanding of this basic concept and whether they can apply it. Right? See that. So this is a question about, basically, interest compounding, right? Do people know that if you get the money and if you have money early on, right, this is more valuable that money later on, right? And so we don't ask people to make fancy calculation, right, but we ask whether they understand the in a sense, how interest compounding works, okay? And again, even though in the US, we ask people to plan for retirement, the finding is that only half of the population is able to answer this question. And one in for Americans who actually do not know that, if you have money early on, is basically more valuable and you will have more later on. Okay, this is actually very much the finding in the old population that overall, people can answer about half of these questions. And I'm pretty sure, by the way, if you you know are one of my student and you only answer half of my question in the test, you don't get a B minus or a C, you get an F, okay, you have to answer at least 70% of the question to have the quiz to be to have a passing grade, right? So this is not a passing grade. And we can also look at the distribution, right, that there is a good proportion of the population who cannot even answer seven of these 28 questions, even though, again, the question are question about everyday life financial decisions, right? We don't ask about whether you're able to price a convertible bond, right? But we ask whether you are able to understand this basic concept, and including in here are the big three.

So you know, financial intensive I do, affects a variety of behavior, not just planning, but more so, what can we do, given this problem? Well, by the way, we do think that financial education doesn't work. We have done a meta analysis of all of the work on financial literacy, and found that financial education is effective and interestingly, affect both the young and the old. So you can do financial education in many ways. So this is why we have also designed financial education in the workplace. And this is one example in which you can do workplace financial education. But I would like to turn to a topic that more passionate about, which is teaching financial interest in school. And let me remind you that you know Pisa, which is the Program for International Student Assessment. By then, by the OECD, which measure the knowledge, the topic that young people, 15 years old, need to have in order to be successful in the labor market, they have added financial literacy into those topic back in 2012 right? So, in a sense, we had a strong recommendation to do so. So, you know, we have been teaching personal finance at GW since 2012 and I've used. Lot of the data. The course is very evidence based, and we also are very paying a lot of attention to each other. Differences at Stanford, financial literacy started in 2020 it has been an extremely popular course. We teach more than 400 students. We have a cap, which we had to raise five times, and unfortunately, we cannot find the classroom large enough to teach all of the students. So we have been teaching in the spring and in the summer.

And also I half of the a lot of our students are athletes. So during the summer, I had half of the football player. I also wanted to show you how I measure up when you look at these people. And these are actually professional football players. I still look like a midget. Look at that. So actually, at GW, we did a program for football player, and at lunch today, we discussed this a lot, and the reason is, I wrote a paper about football player going bankrupt. So these are people that get all of their wealth, unfortunately, where you know when they are young, right? So all of the wealth, by the way, the wealth they get, is the equivalent of the wealth that people get in a lifetime. And in fact, it's even higher. And the problem is, not only they don't use it well, but they go bankrupt, right? And so we are doing program for them, and we are really great that, you know, we have all of this football player in the classroom. And at Stanford, we have really an ecosystem related to financial literacy. We run a seminar series. We have a conference dedicated to teaching personal finance. Going to tell me in a moment, we have a conference dedicated to research and personal finance, and so we are really engaging almost everybody. And let me tell you, in particular about the teaching Personal Finance Conference that we organize every year where we bring together all of the people who are teaching personal finance, from the Ivy League to the community colleges, so that we can exchange ideas, and we are creating a network. And so we are very happy to add the people here who are teaching personal finance so we can continue to improve, and also try to provide courses that are really suited for the student, and also try to attract as many students as possible because of the generosity of one of our alum we are now we have launched this initiative, which is the initiative for financial decision making is actually a collaboration between three institution CPR, which is the Stanford Institute for Economic Policy Research, which is like the policy school, the Business School and the Econ department. And our objective is to really transform personal finance education. And we are very happy to project we are collaborating with a variety of university to pass the effectiveness of financial education, and we are open to collaboration and to short visit as well.

But you know, to really make a difference as you see. You know, these statistics are really stuck. We also need to engage with the policy maker. So, you know, there are national strategy for financial literacy around the world now very much also push and supported by the OECD. And there are many things you you can do during for those national strategy to really, to really promote financial literacy. And one of the big one is to make financial education mandatory in school. So I was actually chairing the educational committee in Italy that designed the National Strategy for financial literacy. I'm going to show you a picture here with our president, President Mattarella, which is our hero. It was a great honor to meet him, and also wanted to show you in the palace in which he lives, right? I mean, that's beautiful. No, everything in Italy is a bit like that. So we made, we actually were able to promote a law that made financial education mandatory in school.

School. And that's very important, because, as I mentioned, Italy is one of the country with the largest gender difference in financial literacy and one of the lowest level of financial literacy among 15 years old. And we are evaluating now the effect of this policy. We have also talked to a lot of central bankers and Minister of Finance. Last February, we were invited to the meeting of the European country, meeting of the governor of the central bank, Governor and finance minister. So we spoke in front of 27 of them, and we have a presentation, by the way, which we just I did at the European Central Bank, which is, why should central bank care about financial literacy, and hope that they can become, as well, a supporter of this policy. And we are also very happy that the World Economic Forum now has also embraced financial literacy, and we hope to work with them to really elevate this topic to the thought leader. Let me summarize, in a sense, what are the main findings, right? That financial literacy is too low. Given that today, we are in charge of making financial decision and to make changes, we need changes at the policy level, in addition to the individual level, but education in school and college really plays an important role. And I want to leave you with this image, while final image, you know, a lot of people you know, ask me, What's the definition of financial literacy? And if I would like, you know, to leave you with an image of financial literacy when I think about it. You know, many things play a role to make our financial decision clearly. You know, education, income, the structure of the financial markets policy, but financial literacy is essential, right? I think of it like a water in an ecosystem, right? We need financial literacy to be able to grow and flourish. I hope that

I hope that Dr. Lusardi's remarks helped you to reflect on your own financial situation, as well as the possibility that there's more to learn about how to make your dollars go further. While compound interest might be the most powerful force in the universe, it's a power that we can harness, if only we continue to keep questioning.

Retrieving the Social Sciences is a production of the UMBC Center for Social Science Scholarship. Our acting director is Dr. Eric Stokan, and our undergraduate production assistant is Jean Kim. Our theme music was composed and recorded by D'Juan Moreland of the UMBC class of 2024. Find out more about CS3 at ocialscience.umbc.edu, and make sure to follow us on Twitter, Facebook, Instagram, and YouTube, where you can find full video recordings of recent CS3 sponsored events. Until next time, keep questioning.