Skip to Main Content

Financial Literacy Studies: Home

Benefits of Financial Literacy

We have highlighted and documented evidence of two important channels that might contribute to the relationship between wealth accumulation and financial literacy: financially knowledgeable individuals are more likely to invest in stocks and have a higher propensity to plan for retirement. We argue that this is because financial literacy lowers the costs of collecting and processing information and reduces planning costs, thereby facilitating the execution of financial decisions and bringing down economic and psychological thresholds for stock market participation or retirement savings calculations and subsequent development of retirement plans.

Our study is complementary to those by Bernheim et al. (2001a) and Bernheim and Garrett (2003) that have shown that financial education in the US (either in high school or via workplace seminars) has a positive impact on savings but have not been able to identify whether this effect is because of individual appetites for saving, provision of information and supply of commitment devices, a broad improvement in financial literacy and reduction of financial mistakes or peer effects. Our work shows that financial literacy is positively associated with wealth accumulation but we cannot infer from this result that the effect of financial education programmes is indeed the result of an increase in financial literacy.17 To assess that finding, we need to be able to separate the impact of financial education on financial ability and knowledge from other channels. A

For researchers and practitioners, this article demonstrates the importance of financial education in fostering the development of a more financially resilient and economically sustainable community. Individuals who are financially literate will be better prepared to withstand financial stress as a result of unforeseen short-term economic shocks. Financial literacy plays a protective role and alleviates financial stress and anxiety. The findings of this study emphasize the critical need for researchers and policymakers to develop more effective and adaptable intervention programs and resources for individuals and families. Financial capacity in the population is necessary for overcoming information acquisition and processing barriers and developing confidence in reaching financial goals. Employers could assist their employees in managing financial stress and achieving financial well-being by providing effective financial education in the workplace. The key findings from this study support the importance of incorporating financial education as part of high school or university curricula and incorporating workplace programs for adults to build and enhance financial literacy. It is never “too late” to educate individuals on financial literacy.

Despite the limitations of this study, financial education appears to be positively related to higher levels of financial literacy especially for those with lower education and income levels. While this study does not show a causal relationship, it does suggest that there is a correlation between taking any type of financial education and subsequent financial literacy as measured by five financial literacy questions. This research will aid those developing financial education programs as results suggest that financial education in high school, college, through an employer, or any combination of the three, is correlated with higher financial literacy scores even years after taking the course. This research also emphasizes a need to teach financial education to those who have lower education and income levels—people whom previous research suggests lacks financial literacy and may need the most help.

This paper summarizes the PFP, a six-week financial literacy improvement program for senior college students at a private liberal arts college, that focuses on major areas of personal finance. An empirical analysis of the program shows that the PFP improves financial knowledge and has a particularly positive impact on female participants. The results for minority participants, while encouraging, are not as robust as for women. Both groups have been consistently shown to possess lower financial knowledge scores. Additionally, participant confidence regarding their future financial outlook significantly improves for all participants: male, female, and minority. Finally, we demonstrate that the improvement in confidence is well placed in that seminar participants demonstrate an improvement in their ability to calibrate their improved confidence to their improvement in financial knowledge. This study extends the previous literature in that the PFP is six weeks long (that is longer than many other interventions), and the change in knowledge and confidence from before and after the program was compared with a control group. Furthermore, the study measures several individual difference factors, allowing the researchers to utilize multiple regression analysis techniques.

The study is not without its limitations. First, we do not measure changes in student behavior. Our speculation about the connection between increases in knowledge and confidence may lead to increased financial self-efficacy can only be tested if we examine how these increases are reflected in behavior. In other words, we can examine if the combination of more knowledge and confidence predicts acting on that knowledge in financially sound ways. The authors are in the process of collecting follow-up behavioral data on the study participants reviewed here.

Second, our research is limited by the sample we use. Due to the nature of the PFP, participants have been limited to only senior level students at a private liberal arts college, that is, the conclusions drawn from this study are limited to a very specific portion of the population. However, the authors are currently expanding the PFP to other universities and are currently summarizing results obtained from a faculty or staff version of the PFP. Finally, given the demographics of the student population represented, we are hesitant to claim all college seniors will respond in similar ways to the program. More research is needed to validate the curriculum in a more diverse setting. Ultimately, this paper expands upon financial literacy research and outlines a robust tool for addressing financial knowledge and confidence.

Our analysis of the existing research on financial education using the most rigorous evaluation methods has three main findings.

First, financial education treatment effects from RCTs have, on average, positive effects on financial knowledge and behaviors. This result is very robust: it holds up to accounting for publication bias, including only adequately powered studies, looking only at studies published in top economics journals, and accounting for heterogeneity across studies. Financial education interventions have sizable effects on both financial knowledge (+0.2 SD units) and financial behaviors (+0.1 SD units). Thus, the treatment effects on financial knowledge are quite similar to or even larger in magnitude than the average effect sizes realized by educational interventions in other domains such as math and reading (see Hill et al. 2008; Cheung and Slavin 2016; Fryer 2016; Kraft 2018) and the effect sizes on financial behaviors are comparable to those realized in behavior-change interventions in the health domain (e.g., Rooney and Murray 1996; Portnoy et al. 2008; Noar et al. 2007) or behavior-change interventions aimed at fostering energy conserving behavior (e.g., Karlin et al. 2015). Our findings are in stark contrast to the findings presented in the first meta-analysis of the financial education literature (Fernandes et al. 2014). How can we interpret these differences in findings? While we are unable to replicate the original result on RCTs presented in Fernandes et al. (2014) (see Appendix D), we observe that the number of recent RCTs added to the database is driving the more positive result of financial education treatment effects on financial knowledge and behaviors. Additionally, we show that 29 explicitly accounting for heterogeneity in studies and programs is crucial in assessing the average impact of financial education.

Second, there is no evidence to support or refute decay of financial education treatment effects six months or more after the intervention. Since only six studies in our sample look at impacts 24 months beyond the intervention, we cannot rule out that this effect is statistically different from short-run effects. Because the present literature is characterized by very few longer-term impact assessments, the evidence on the sustainability of effects is inconclusive. What we can say, however, is that we do not find evidence for dramatic decay up to six months after the intervention.

Third, we document that the estimates of statistical effect sizes are economically significant. We further document that many of the financial education interventions studied in randomized experiments are cost-effective. This finding is crucial, since the discussion of the effectiveness of financial education has focused on statistical effect sizes without considering their economic interpretation. The evidence in this meta-analysis summarizes financial education interventions from 33 countries and six continents, across the lifespan of individuals. The analysis carefully accounts for heterogeneity across interventions. However, there are still some limitations. Since few RCTs study long-run effects, it is hard to determine the long-run impacts of these interventions. The same is true for the quality of the data used to study changes in financial behaviors: Few studies are able to link their experiments to administrative data, so the usual caveats of having to rely on self-reported survey data also apply to this literature. Future research should aim to collect longer-run administrative data or follow up with original participants from earlier field experiments.

Finally, we encourage more studies to report on the costs of their programs, in order to provide policymakers with an estimate of cost-effectiveness.

Financial Literacy Among Different Demographics

This is focused on millennials but also contains a graph comparing financial literacy among millennials, GenX, and Baby Boomers on page 4.

There is a Gen Y financial literacy gap—on average, millennials answered 44% of the P-Fin Index questions correctly, while the U.S. adult population answered 50% correctly. But there is also a notable difference in financial knowledge between younger and older millennials. Older millennials answered 47% of the P-Fin Index questions correctly, on average, compared with 41% for younger millennials.

We have observed increases in funding and policy efforts across the country to provide more financial literacy education. The number of states requiring financial literacy education at the high school level has increased from 1 in 1998 to 17 in 2016. The core of these efforts is prescribed to help reduce the widening wealth gap. We find that financial education does indeed contribute to an increase in financial literacy knowledge; however it is advancing whites at a greater rate than minorities. Thus, provided the given assumption of positive correlation between financial literacy and financial behaviors, the difference in the returns of financial literacy education may be contributing to the perpetuation of the wealth gap instead of closing it as intended. We speculate two related reasons why the returns to financial literacy education are higher for whites than minorities. First, financial literacy curriculum is administered without considering the education and resources available to the students being served; second, our data focus on enrollment into financial literacy education programs and not on completion. The two, however, may be interdependent. Higher attrition rates in minority communities may be attributed to the curriculum design of the financial literacy program.

Finally, our results indicate that financial literacy differences are not solely due to access to financial literacy education, there are other reasons that lead to whites having higher financial literacy than minorities. Bottomline, providing financial literacy education, in its current form, will not accomplish the goal of narrowing the wealth gap. Policymakers should examine the content of their financial literacy programs and the sources of financial literacy education to identify if there is a systemic bias in the provision of financial literacy education.

Overall, the data suggest that over a six-year period the gender gap in financial literacy has persisted, though the gap decreased for millennials—particularly when “Don’t know” responses, which women use more often than men, are excluded. Across generations, women were less likely than men to report that they were offered financial education, and this is important because participating in financial education is associated with higher levels of financial literacy for both women and men. In addition, the self-assessed financial knowledge of women is lower than that of men, but the gap between millennial women and millennial men has decreased. Lastly, married millennial women are more likely than married gex X and married boomer women to identify themselves as the most financially knowledgeable person in their households, suggesting rising levels of financial confidence among younger American women.

This study is of specific importance to policymakers, financial educators, financial counselors, and financial planners. From a policy perspective, this research suggests that low risk-tolerant African Americans have a systematically lower understanding of basic financial concepts. Parameter estimates from logistic specifications indicate that the likelihood of risk-seeking behavior was affected most by financial literacy and gender and, to a lesser extent, by income groups. African American women live longer than African American males, and in many families, they handle the financial resources; it would appear that bridging the gender gap is a means of financial survival (Young et al., 2017).

African Americans appear no different from any other group of Americans when provided with financial education that can improve financial literacy and financial risk tolerance levels, which are critical for reaching long-term wealth goals. The fact that financial risk tolerance is strongly related to financial literacy has critical implications for wealth building. Findings from this study provide some insight into the significance of financial risk tolerance diversity among African Americans. In particular, financial risk tolerance was positively associated with financial literacy levels, which suggests evidence that there is a tangible benefit in financial education. All Americans, including African Americans, would benefit from financial education, and financial planners—as community partners—have an opportunity to expand their client base by engaging in financial education.

Overall, this research reinforces concerns noted in previous studies about African Americans’ ability to embrace different levels of risk in wealth-building opportunities (Chatterjee et al., 2017Hanna et al., 2012Herbert et al., 2005Lusardi, 2005Yao et al., 2005). This study reinforces Hamilton and Darity’s (2017) conclusion that improved access to higher education alone does not significantly address the wealth gap. Further, not all financial education has the same outcomes, and the focus of the training must move toward financial capabilities, not just consumer awareness. The world of financial services can often be intimidating. As the economic landscape is ever-changing and with more freedom available, it's easy to assume that families benefit from understanding their finances. Financial policymakers, in requesting financial education options, should consider multiple community outreach programs, not just K-12 outlets. For example, community-based programs, employer-based programs, and free online courses are essential starting points. When equipped with appropriate financial education, most Americans would embrace diversification in wealth building and retirement planning.

There were a few limitations to this study. To the extent the sample is not a broad representation of the African American population, the parameter estimates could be biased upward or downward. This study implies a need for future research on financial literacy versus primary financial education, such as analyzing financial risk tolerance levels or portfolio composition of a sample with the same set of similar financial behaviors, with ethnicity being the only difference. Further, by increasing the target number of African American households, it would be possible to conduct a robust analysis of financial education's effects on African Americans’ financial risk tolerance levels.

Overall, the results of the logit analysis revealed that age, education, and household income, are positively associated with the likelihood of a consumer having an employer sponsored retirement plan. These results support hypotheses 2 (household income levels), 3 (age groups), and 4 (education level) and previous research. However, the results of the analysis do not support hypotheses 1 (minority groups) and 5 (gender).

The results of this study can possibly assist practitioners and employers in increasing the participation rates in employer-sponsored plans. The results reveal that the older, more educated, and higher household income a consumer has, the more likely they are to enroll in their employer’s plan. Employers and practitioners should move beyond minority groupings and take a more in-depth look at the population they are dealing with when attempting to increase enrollment (Stern, 2020). In doing so, retirement plan education programs can be tailored to provide information to employees on the primary reasons for taking advantage of their employer plans, while providing scenarios based on age, education, and household income.

With a decrease in the qualified-benefit plans and the increase in qualified contribution plans, consumers are given ownership of how much and where to invest their funds for retirement. When these plans are provided to employees, information like the results of this study should be provided to them explaining the information broken down by age, household income, and education. In doing so, employees can identify more with the data by categorizing themselves into the groups that are more familiar. Whether or not this additional information will increase participation rates is uncertain. However, as stated previously, prior research has shown that awareness can increase participation rates. By providing awareness of how age, household income, and education effects participation to employees, companies stand to increase their employee’s enrollment and further assist them in obtaining a successful retirement.

The hypothesis that personality traits affect financial literacy is not supported. It was not possible to find a significant difference in financial literacy depending on whether participants had emotional intelligence or system intelligence. The authors therefore believe that it is a worthy research project to carry out a similar study where more variables are examined that can shed light on the gender difference in financial literacy.

The results of the study show that women have less financial literacy than men. These results are not surprising but are in line with both domestic and foreign studies that have been conducted in the past (Lusardi and Mitchell 2008; Bucher-Koenen et al. 2014; Yu et al. 2015; Lusardi et al. 2014; Atkinson and Messy 2012; Alesina et al. 2013). The author finds it worrying, however, that this difference still exists even though Iceland is at the forefront when it comes to gender equality. In the World Economic Forum report for 2020, Iceland is at the top of gender equality, for the 11th year in a row (World Economic Forum 2020). It is the authors hope that this research will lead to the awakening that there is still a lot lacking when it comes to gender equality, even in Iceland. A possible explanation for the consistent gender difference in financial literacy has been suggested by Fonseca et al. (2012). They suggest that within households men are more often than women specialized in financial decisions and thereby gather more knowledge in this particular area of expertise.

Age also affects financial literacy, but with age often come certain experiences, so it is not unexpected that those who are older have better financial literacy than younger individuals. Education also affects financial literacy, as has been suggested by previous research and these results are therefore not surprising (Lusardi and Mitchell 2011c; Christelis et al. 2010; Lusardi 2012).

The authors also find it interesting to see women answer questions relatively much more often with “do not know” than men. It would be interesting to see what lies behind this. Could it simply be a matter of less understanding, or could it possibly be attributed to women’s insecurity in finances (Chen and Volpe 2002)?

Like all research, this study has several limitations. First, our results are limited to Iceland, which reduces the generalizability of our findings considerably.

Using register data on the Finnish population, we show that both ability (measured with comprehensive school GPA) and educational attainment are relevant predictors of fnancial distress, even after accounting for childhood family environment. Low GPA is an especially useful predictor of fnancial distress years later for those who attain a secondary-level education at most. Our results suggest that any societal interventions to mitigate fnancial distress should particularly focus on low GPA individuals, and especially those unlikely to continue their studies after completing comprehensive school.

The racial wealth gap in 2016 was still as large as it was in the 1950s and 1960s (Schularick et al., 2018), and non-White households were more critically impacted by financial crisis compared to White households (Schularick et al., 2018; Wolff, 2017). The persistent racial/ethnic wealth gap in the United States has been a pressing issue that requires significant attention from members of the public who are interested in strengthening financial stability in the United States (Thompson, 2018). While various factors have been attributed as the cause of this wealth gap, Lusardi et al. (2017) showed that financial knowledge is one of the key determinants of wealth inequality. Financial knowledge has been discussed as a key factor positively related to diverse financial behaviors and financial wellbeing (Allgood & Walstad, 2013; Chan & Chan, 2003; Friedline & West, 2016; Hilgert et al., 2003; Robb & Woodyard, 2011). In addition, previous studies discussed the detrimental effect the overconfidence in financial knowledge could have on financial practices (Kim et al., 2020; Lee & Hanna, 2020; Lee & Kim, 2020; Porto & Xiao, 2016; Robb et al., 2015). Financial knowledge and overconfidence could affect one’s financial behavior on many degrees, from day-to-day financial practices to more complex tasks such as investments and retirement planning. The racial/ethnic differences in financial outcomes could either be narrowed or widened due to the gap in financial knowledge in addition to preexisting systematic economic inequalities. Thus, this study focused on understanding the racial/ethnic gap in financial knowledge which could provide insights for practitioners, educators, and policymakers whose objectives are improving the quality of financial decision making in general and eventually decreasing the racial/ethnic gap in financial well-being.

The results presented in this study identified several factors related to racial/ethnic disparities in financial knowledge. The detailed results of the decomposition analyses found that sociodemographic variables, such as age, marital status, education, and occupation, contributed consistently to explaining the variation in the financial knowledge indices between racial/ethnic groups. Education is a factor on which policymakers and educators could focus to narrow the disparities in financial knowledge. Warikoo and Carter (2009) asserted that overcoming barriers in opportunities is insufficient to fully eliminate racial inequality in educational attainment. Given the link between financial knowledge and wealth accumulation (e.g., Lusardi et al., 2017), it is important to reduce the racial/ethnic gap in financial knowledge by addressing the racial stratification in financial educational performance to remedy persisting wealth inequality which Schularick et al. (2018) provided empirical evidence of.

Individual financial characteristics also contributed to the racial/ethnic gap in financial knowledge. For example, income, homeownership, financial hardship were very important contributors. This may be attributable to low-income and low asset minority households’ limited exposure to financial experiences, which prevented them from accumulating related knowledge. Personal experience related to financial instruments and services could have helped individuals acquire financial knowledge (Tang & Peter 2015). The OLS regressions showed that the level of financial hardship was associated negatively with all three dependent variables. This result suggests that those individuals who had financial difficulty were likely to be the ones who lacked both objective and subjective financial knowledge which resulted in less overconfidence.

The state average in the financial knowledge level also contributed significantly to the gap. Lachance (2014) has presented evidence of neighborhood effects in financial literacy by including zip code average education level, and our analyses supported this finding. While we used the state, rather than the zip code, average in our analyses, the fact that the state average in objective and subjective financial knowledge and overconfidence in financial knowledge had statistically significant effects in the OLS regression results suggests that the respondents’ geographical location is important with respect to financial knowledge levels. In addition, the state variables that helped explain the racial/ethnic disparities in the decomposition analyses could be attributable to a potential neighborhood effect. Another possible explanation is the difference in the states’ regulations on financial aid for students, education, or the financial market. Over the past several decades, the number of states that offer financial education in high school has been increasing. However, not only the year that mandatory financial education was implemented but also the content and type of mandatory education differ among the states. Not all of the states have made this a requirement, but high school financial education could have a crucial impact in the long run. Bernheim et al. (2001) documented a difference in subsequent asset accumulation by middle-ages due to the exposure to state mandate high school financial education. Brown et al. (2016) also found evidence of the positive effect high school financial education had on debt behaviors after graduation between age 19 to 29. The significance of the state variable in our analyses suggests state-specific policies’ potential effect and suggests ways that a local network could influence racial/ethnic disparities.

Additional insight for educators is the positive association between mathematical ability and financial knowledge. According to the results of the decomposition analyses, mathematical ability contributed considerably to the racial/ethnic gap. Previous studies have found that numeracy is a key factor in financial behaviors, such as stock market or housing market participation (Almenberg & Dreber, 2015; Christelis et al., 2010; Lusardi & Mitchell, 2011a). Further, numeracy was found to be a determinant of financial literacy (Jayaraman et al., 2018; Skagerlund et al., 2018), and our analyses found evidence that corroborated this relation. Considering these dynamics of the results variables, it is important for educators to grasp fully the effect that mathematical ability can have on an individual’s life. On the other hand, financial education was not attributable to explaining the racial/ethnic disparities in financial knowledge, which leads to further questions about whether efficient and effective financial education is in place.

Effective Financial Literacy Centers

In the first part of this paper, we examine the existing literature and data on community college students’ academic and non-academic expenses, their access to financial aid, and their unmet needs. We provide examples of financial aid interventions to demonstrate how colleges can support students’ financial needs when they lack resources to pay for college expenses. Furthermore, we examine the research on students’ financial knowledge and frameworks for financial education.

In the second part of this paper, we present data on students participating in the Guardian Money Management for Life (MMFL) program, a financial empowerment program offered at several community colleges that provides students with both financial management education and expanded access to financial aid and services. We include profiles of three community colleges participating in the MMFL program: The University of the District of Columbia Community College in Washington, DC; Berkshire Community College in Massachusetts; and Capital Community College in Connecticut. These colleges were chosen because of their successes in expanding the MMFL personal finance course into a broader student success initiative that connects students to campus and community resources.

Pedagogy of Financial Literacy Studies

The findings indicate that variation theory is a powerful tool for developing not only the understanding of students of a specific concept (as reported in previous studies) but also their financial literacy, a kind of domain-specific generic capability, in terms of their ability to handle complex, everyday financial situations. Students belonging to the learning study group outperformed their counterparts in the lesson study group in all three post-lesson tests conducted, and the differences in the learning outcomes of the students were found to be statistically significant. There appears to be an association between student learning performance and the conscious and intentional structuring of lessons by teachers in accordance with a framework grounded in variation theory, that is, lessons created using a certain pattern of variation and invariance that corresponds to the critical features of the phenomenon in question or the object of learning identified. Furthermore, a persistent and even widening performance gap was observed between the learning study and lesson study groups over time. Regarding the short-answer questions, the difference in mean scores between the two groups first increased from -1.39 (pretest) to 19.21 (posttest), dropped slightly to 16.06 (first delayed posttest), and then increased to 18.19 (second delayed posttest). With regard to the multiple-choice questions, the intergroup differences in mean score in the pretest, posttest, and first delayed posttest were 1.04, 5.53, and 7.06, respectively.

Figure 1 shows that the difference between the two groups in terms of effect size also remained or increased over time. With regard to the multiple-choice questions, the effect sizes showed an upward trend (i.e., pretest = 0.115, posttest = 0.429, first delayed posttest = 0.592). A similar trend was observed for the short-answer questions. The effect size was negative (-0.231) in the pretest, increased to 1.097 in the posttest, dropped slightly to 0.9185 in the first delayed posttest, and increased to 1.359 in the second delayed posttest. Apparently, students in the learning study group were comparatively more able to sustain their ability to handle financial problems in novel situations over time than those in the lesson study group, or at least the fading-out effect was less pronounced. The former 674 M. F. Pang 123 appeared to have developed the ability to transfer a domain-specific generic capability, financial literacy, from one context to another over time. This lends support to the notion of generative learning; that is, the learning of students went ‘‘beyond the learning situation itself and [students] developed a way of seeing the learning object in forthcoming situations that deepens the knowledge further in every new situation’’ (Holmqvist et al. 2007, p. 188).

For education policy makers, as a long-term strategy, they need to seriously consider the suggestion of adding a separate personal finance course as one of the requirements for high school graduates to arouse the public attention to the importance of financial literacy. The recent development of requiring each school district in Texas to offer a one-half credit elective in personal financial literacy in high schools, starting in the 2016-2017 school years, was a move towards the right direction as derived from the participants' views (Texas Education Agency, 2016). The Texas Education Agency (2018) has included personal financial literacy course with breakouts for course materials and student expectation in its proclamation 2019 to the Texas Essential Knowledge and Skills (TEKS). Another recommendation, similar to what OECD (2017a) has proposed as a policy implication to the G10 countries, is to start the financial education early from schools, and to incorporate more financial literacy elements in the state assessment test.

For technology vendors and program designers, one recommendation is to focus their designs to meet the needs of their users including the state education approval requirements. The course content can be designed with reference to the list of materials as approved by the Texas State Board of Education (Texas Education Agency, 2012). The approved materials included the understanding of bank accounts, check book balancing, home renting versus buying, money management when transitioning from home renting to owning, avoiding credit card debt, consumer loans with associated risks, bankruptcy, investment, retirement planning, insurance, charitable donation, college financing, federal student aid application, and small business establishment (Texas Education Agency, 2012). Moreover, it would be helpful to develop educational games to arouse learners' interest. When designing the programs, it is important for the technology vendors to consider the factors of costs, ease to use, cultures, languages, and modules flexibility to suit the needs of the users.

A personal finance elective course was developed within a pharmacy curriculum through consultation with finance experts and a literature review, with the goal of empowering students to make informed choices related to finances.9 As part of the didactic curriculum at the institution, students complete six one-semester-hour electives and can choose from a variety of topics. The elective course took place for two hours per week, over six weeks, and was delivered through a mix of live videoconferencing and asynchronous delivery. The objectives of this study were to examine student knowledge about finances before and after the course, to assess students’ intentions to implement financial practices after the course, and to evaluate the use of personas as an innovative instructional strategy.

To relay the material in an applicable manner, the course used personas as an instructional strategy. Personas are research-based narrative profiles created to reflect a variety of typical users and have long been used by software developers as part of user-centered design. In education, personas have been used to help students acquire skills, increase empathy, and obtain perspective in professional and health education.11 For the finance elective, personas were created based on common debt profiles of pharmacy graduates seen in our review of the literature and anecdotal experiences of recent graduates. Using personas meant that students were not required to divulge personal information about their financial situations and allowed for the introduction of various concepts, such as tuition costs, decreased income during residency completion, providing for a family upon graduation, and financial planning for larger purchases. Details about the financial situation of the personas were provided, including their amount of student loan and other debt, the employment they acquired after graduation, salary, income of spouse (if applicable), and credit score. Each student was assigned a persona for the duration of the course for a variety of assignments. An example of a persona used in the course can be provided upon request. Activities and assignments were designed to create an engaging course that allowed students to experience and apply financial concepts. Table 1 lists each activity that was used in the course.

At the start of the course, students were asked to create a SMART (specific, measurable, achievable, relevant, and time-bound) personal financial goal. At the end of the course, students reflected on their financial goal regarding whether it was realistic, what changes they would make, and whether they had any additional goals related to personal finance after participating in the course. By completing this reflection, students were able to see their growth in knowledge and how that impacted their goal. To introduce the concepts of debt repayment and longterm financial planning, students completed debt reduction and savings plan assignments. In these assignments, students used their personas to create a plan for paying off debts while using debt repayment calculators, which factored in interest. They also created a plan for savings, including emergency funds, investments, and retirement using retirement planning calculators, which accounted for growth of assets. Students were given financial literacy assessments prior to and at the conclusion of the course to determine baseline knowledge and knowledge attained throughout the course. No preparation was expected before the preassessment, which was given prior to the start of the course. Additionally, a credit and debt discovery activity was implemented as an engaging way to teach concepts such as loan repayment, credit scores, banking, and loan forgiveness. Students were broken into small groups and assigned a variety of questions on credit and debt. Each group was tasked with discovering the answers to these questions and sharing those answers with the whole class. This gave students a chance to explore resources available online for personal finances

Based on previous research, we know that individual characteristics and behavioral biases can affect saving and investing decisions, resulting in suboptimal retirement outcomes. For example, financial illiteracy and present bias may cause people to save too little or too late, compared to others with similar risk preferences but better financial knowledge. High levels of risk aversion may result in overly conservative investment portfolios that are inadequate to fund retirement. For the reasons discussed previously, younger workers are more at risk for retirement income shortfalls and will need to save more to support their expected longer retirement periods.

In this study, we use an incentivized laboratory experiment to test the efficacy of alternative behavioral prompts to motivate improved outcomes for young adults. Participants make a decision to receive earnings in cash or to delay receipt of the funds in return for earning guaranteed interest or risky investment returns. In addition to testing the effects of various prompts on this decision, we measure and control for individual financial literacy, risk preferences, and time preferences and test for the presence of certain behavioral biases. As compared with many lab experiments, our experiment incorporates salient financial incentives (up to $270) over a meaningful time horizon (26 weeks). In the base case, participants make investment decisions without receiving any behavioral prompts. In the other treatments, we consider the effects of invoking the future self, setting goals in advance of saving/investment decisions, and receipt of investment advice targeted to achieving goals. In addition to testing the effects of these behavioral prompts, our experiment design is distinguished from previous research in that we elicit measures of our control variables using tasks and monetary incentives that compare with those associated with the treatment variables (vs. simply surveying participants over their self-perceptions, or offering substantially smaller monetary stakes, in some tasks while offering salient paid rewards for other tasks).

To test the effect of behavioral prompts on saving and investment decisions, we measure outcomes by directly analyzing average asset allocations and indirectly measuring the distribution of asset allocations through dollar expected returns. Our most important contribution is that participants with lower levels of financial literacy benefited the most from behavioral prompts in terms of higher expected return. This suggests that their decisions may be resulting from lack of information in addition to their individual risk and time preferences. However, on average, the prompts had only marginally significant effects. Therefore, we have strong evidence against administering a “one size fits all” policy. Prompts that provide additional information guiding careful decisions can help to align allocations with individual goals, but outcomes will differ based on individual risk preferences and discount rates. In our experiment, we did not attempt to steer participants to focus on goals that would specifically increase saving or to invest in risky asset allocations. To the extent that policy makers and retirement plan sponsors are interested in increasing retirement contributions, our results suggest that assistance with retirement goal setting could result in higher savings rates for plan participants.

Consistent with findings of other studies on time discounting, our sample exhibits generally high discount rates. We also find a significant present bias in that participants require higher discount rates between present and future consumption than they do for similar periods of future versus future consumption. In our analysis, we only controlled for the discount rate which applied to the investment time horizon. However, testing the impact of present bias on expected return and asset allocation in a laboratory setting is a promising avenue for future research. For plan sponsors, financial advisors, and policymakers interested in encouraging increased retirement saving, results on present bias suggest that investment prompts should focus on future, rather than current, saving decisions. Individuals with a present bias would be more likely to agree to salary reduction agreements or automated savings plans that apply to future income rather than current income.

Overall, expected returns were positively related to financial literacy and negatively related to personal discount rates. This is a result of significant differences in how more patient and more financially literate participants allocated their funds compared to others. Controlling for personal preferences, higher levels of financial literacy result in significantly lower allocations to cash and conservative investments and higher allocations to the high growth investment choice. Participants with higher discount rates took more of their funds in cash instead of investing.

While the impact of financial literacy on expected returns in our experiment is in line with previous research, the participants in our experiment, on average, exhibit higher levels of financial literacy and numeracy compared to other studies. A unique design feature for our experiment is that we incentivized correct answers, and we also provided participants with basic calculators on the financial literacy quiz. Future financial literacy research may shed more light on this, but our results suggest that levels of financial knowledge and ability may be higher than that measured in previous research studies.