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Financial Literacy and Asset Behaviour: Poor Education and Zero for Conduct?

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We don’t need no education….

Roger Waters, “Another Brick in the Wall”, 1979

Abstract

Financial Literacy is a specific component of human capital which allows individual to deal with fundamental financial issues so as to take adequate financial decisions. After presenting the theoretical foundations of this notion, establishing its definition and reviewing the empirical literature, this paper presents recent studies about the link between financial literacy and financial decisions of the population in France using an original survey. The results suggest that financial literacy varies across the population. It is correlated with education but also with gender, age and political affiliation. This last point could reflect differences in opinion regarding the role of welfare state and individual responsibility. Finally, the link between financial literacy and some financial behaviors (the propensity to formulate a specific financial plan in the long run on the one hand and the propensity to own stocks on the other hand) is evaluated: in both cases positive correlations with financial literacy variables are found. We conclude with a reflection on the relative status of financial education to explain the investments of households and judge the effectiveness of training programs in the economic culture.

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Fig. 1

Source: PATER survey, 2011 (from Arrondel et al. 2013. Financial Literacy and Financial Planning in France. Numeracy.6:2, Article 8.)

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Notes

  1. Or, in the words of Thaler (2000), “From Homo Economicus to Homo Sapiens”.

  2. Waxing much more lyrical, Paul H. O'Neill, former Secretary of the US Department of the Treasury, delivered essentially the equivalent message in 2002: “Financial education can be compared to a road map to the American Dream. I believe that we need to teach all Americans the necessary tools to read that map, so that they can reach the Dream”.

  3. Annamaria Lusardi speaking to the Global Financial Literacy Summit in 2013.

  4. This does not appear to be the case with the French households in the PATER survey, whereby some 75% of them rate their financial knowledge as poor or very poor, if not non-existent.

  5.  As instrumental variables, we used a variable on parents’ reading frequency of economic and financial press and another regarding whether respondents’ parents planned for retirement or not. We also used a variable assessing the level in mathematics the respondent had when he was at school. The estimated residual of the regression of financial literacy on the instruments and other exogenous variable is not significant in the financial planning equation.

  6. In another paper, Arrondel and Masson (2017) analyse why does household demand for shares decline during the crisis. This study used same French data from the various waves of the PAT€R survey which offer a unique perspective on savers over time, before and after the 2008 crisis, up to end-2014. The surveys take stock of household assets and provide subjective information with which to measure, using a variety of methods, individual preferences with regard to risk, their expectations about the labour market and the stock market and financial literacy. The key findings are the following: the investments of French savers were less and less frequently placed in risky assets during the crisis; this results in part from their having adjusted their expectations downward as regards yield from shares and shocks on current resources; the preferences and financial literacy of French households with regard to risk remained stable during the crisis.

  7. Jappelli and Padula (2013) argue that the stock of financial literacy early in life is a valid instrument in the regression of wealth on financial literacy.

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Acknowledgements

The author gratefully acknowledges CEPREMAP for their support to write this article on the Public Finance and Redistributive Policies research programme. The article was presented to the AMF scientific conference on 20 June 2016. It draws largely on the findings of two studies by Arrondel et al. (2013, 2015). Comments of Laurent Clerc, Paul Wachtel and two anonymous referees have been welcome. Thanks are also due to Michel Bibard for his really useful editing.

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    Luc Arrondel

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Arrondel, L. Financial Literacy and Asset Behaviour: Poor Education and Zero for Conduct?. Comp Econ Stud 60, 144–160 (2018). https://doi.org/10.1057/s41294-018-0053-9

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