literacy questions. Yuni Yan and Hiroaki Matsuura provided excellent research assistance.

We analyze a national sample of Americans with respect to their debt literacy, financial experiences, and their judgments about the extent of their indebtedness. Debt literacy is measured by questions testing knowledge of fundamental concepts related to debt and by selfassessed financial knowledge. Financial experiences are the participants ’ reported experiences with traditional borrowing, alternative borrowing, and investing activities. Overindebtedness is a self-reported measure. Overall, we find that debt literacy is low, especially among women, the elderly, minorities and those with low income and wealth. Even after controlling for demographics, we find a strong relationship between debt literacy and both financial experiences and debt loads. Specifically, individuals with lower levels of debt literacy tend to transact in high-cost manners (incurring fees and using high-cost borrowing). In applying our results to credit cards, we estimate that less knowledgeable individuals pay 46 percent more fees than do the more knowledgeable individuals. The less knowledgeable also report that their debt loads are

Increasingly, individuals are in charge of their own financial security and are confronted with ever more complex financial instruments. However, there is evidence that many individuals are not well-equipped to make sound saving decisions; that they do not possess adequate financial literacy. This paper demonstrates widespread financial illiteracy among the U.S. population, particularly among specific demographic groups. Those with low education, women, African-Americans, and Hispanics display particularly low levels of literacy. Financial literacy impacts financial decision-making. Failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior can all be linked to ignorance of basic financial concepts. While financial education programs can result in improved saving behavior and financial decision-making, much can be done to improve these programs ’ effectiveness. 1

The American pension environment is undergoing a dramatic shift from defined benefit, in which the amount of retirement benefits are determined largely by years of service, to defined contribution, in which retirement wealth depends on how much workers save and how they allocate their pension wealth. A wide range of financial products are now available for retirement saving, and workers are called upon to make investment decisions. Thus it is more important than ever for households to have a high degree of financial savvy. However, as this brief will demonstrate, there is widespread financial illiteracy. Many households are unfamiliar with even the most basic economic concepts needed to make sensible saving and investment decisions. This has serious implications for saving, retirement planning, retirement,

We develop a dynamic model to study the interaction between obfuscation and investor sophistication in retail financial markets. Taking into account different learning mechanisms within the investor population, we characterize the optimal timing of obfuscation for a profitmaximizing monopolist. We show that educational initiatives that are directed to facilitate learning by investors may induce producers to increase wasteful obfuscation, further disorienting investors and decreasing overall welfare. Obfuscation decreases with competition among firms, but increases with higher investor participation in the market.

Financial development is critical for growth, but its micro-determinants are not well understood. We test leading theories of low demand for financial services in emerging markets, combining novel survey evidence from Indonesia and India with a field experiment. We find a strong correlation between financial literacy and behavior. However, a financial education program has modest effects, increasing demand for bank accounts only for those with limited education or financial literacy. In contrast, small subsidies greatly increase demand. A follow-up survey confirms these findings, demonstrating that newly opened accounts remain open and in use two years after the intervention.

This paper analyzes new data on financial literacy and financial sophistication from the 2008 Health and Retirement Study. We show that financial literacy is lacking among older individuals and for the first time explore additional questions on financial sophistication which proves even scarcer. For this sample of older respondents over the age of 55, we find that people lack even a rudimentary understanding of stock and bond prices, risk diversification, portfolio choice, and investment fees. In view of the fact that individuals are increasingly required to take on responsibility for their own retirement security, this lack of knowledge has serious implications. 1

and Vanguard. The authors also acknowledge Vanguard’s efforts in the provision of recordkeeping data under restricted access conditions. They benefited from the suggestions of Brigitte Madrian, Alexander Muermann, and Stephen Shore. Opinions, errors, and conclusions are solely those of the authors and do not represent the views of the SSA, any agency of the Federal Government, Vanguard, the MRRC, or any other institution with which the authors may be affiliated. ©2008 Mitchell, Mottola, Utkus and Yamaguchi. All rights reserved. Menu Effects and Retirement Saving: The Impact of Life Cycle Funds on 401(k) Plan Portfolios The introduction of Life Cycle funds into 401(k) pension plan menus offers a rich environment in which to assess how changing investment menus shapes workers ’ pension investment decisions. We show that when employers introduce life cycle funds which provide professional rebalancing for already-existing investment options this fundamentally alters employees’ investment patterns. Using a unique new dataset on corporate defined contribution plans, we show that behavioral explanations do motivate worker investment patterns; those most swayed by changing the menu include low-wage workers and those thought to be least financially literate. Yet we also find that some new hires exert what appears to be rational choice in their

Household …nancial market participation a¤ects asset prices and household welfare. Yet, our understanding of this decision is limited. Using an instrumental variables strategy and dataset new to this literature, we provide the …rst precise, causal estimates of the e¤ects of education on …nancial market participation. We …nd a large e¤ect, even controlling for income. Examining mechanisms, we demonstrate that cognitive ability increases participation; however, and in contrast to previous research, …nancial literacy education does not a¤ect decisions. We conclude by discussing how education may a¤ect decision-making through: personality, borrowing behavior, discount rates, risk-aversion, and the in‡uence of employers and neighbors.

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