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.

While commitment devices such as defaults and direct deposits from wages have been found to be highly effective to increase savings, they are not available to the millions of people worldwide who work in the informal sector or as independent entrepreneurs, since they do not have a formal wage bill. Self-help peer groups are an alternative commitment device that is widespread and highly accessible. We conducted two randomized field experiments among low-income micro-entrepreneurs in Chile to analyze their effectiveness. In the first experiment, we find that self-help peer groups are very potent at increasing savings. In contrast, a more classical measure to increase savings, a substantially increased interest rate, has no effect on the vast majority of participants. A second field experiment is designed to unbundle the key elements of peer groups as a commitment device and finds that surprisingly, the actual meetings and peer pressure do not seem to be crucial for their effectiveness.

We analyze the effects of cognitive abilities on two examples of consumer financial decisions where suboptimal behavior is well defined. The first example features the optimal use of credit cards for convenience transactions after a balance transfer and the second involves a financial mistake on a home equity loan application. We find that consumers with higher overall test scores, and specifically those with higher math scores, are substantially less likely to make a financial mistake. These mistakes are generally not associated with nonmath test scores. (JEL D14, G21) Individuals commonly make financial decisions that would be considered suboptimal according to standard consumer finance theory (e.g., Agarwal et al. 2009; Bertrand and Morse 2011; Choi, Laibson, and Madrian 2011). Financial decisionmaking behavior has potentially wide ranging ramifications on society. For example, the boom and bust in US housing markets that helped precipitate the recent economic downturn was likely due in part to poor household decision making. Yet

The endowment effect has been widely documented. Recent models of reference-dependent preferences indicate that expectations play a prominent role in the presence of the phenomenon. A subset of such expectations-based models predicts an endowment effect for risk when reference points change from certain to stochastic. In two purposefully simple risk preference experiments, eliminat-ing often-discussed confounds, I demonstrate both between and within-subjects an endowment effect for risky gambles. While subjects are virtually risk neutral when choosing between fixed gambles and changing certain amounts, a high de-gree of risk aversion is displayed when choosing between fixed amounts and chang-ing gambles. These results provide needed separation between expectations-based reference-dependent models, allow for evaluation of recent theoretical ex-tensions, and may help to close a long-standing debate in decision science on inconsistency between probability and certainty equivalent methodology for util-ity elicitation.

This paper uses data from the Health and Retirement Study to explore the mechanism that underlies the robust relation found in the literature between cognitive ability, and in particular numeracy, and wealth, income constant. We have a number of findings. First, the more valuable the pension, the more knowledgeable are covered workers about their pensions. We suggest that causality is more likely to run from pension wealth to pension knowledge, rather than the other way around. Second, most measures of cognitive ability, including numeracy, are not significant determinants of pension and Social Security knowledge. Third, standardizing for incomes and other factors, a pension of higher value does not substitute for other forms of wealth. Rather, counting pensions in total wealth, those with more valuable pensions save more for retirement, other things the same. Fourth, there is no evidence that wealth held outside of pensions is influenced by knowledge of pensions. In sum, numeracy does not influence wealth in whole or in part by affecting financial knowledge

Abstract This paper highlights the extent and effects of financial illiteracy among American households, reviews previous efforts to promote financial literacy, and discusses new directions for such initiatives. None of the four traditional approaches to financial literacy -employer-based, school-based, credit counseling, or community-based -has generated strong evidence that financial literacy efforts have had positive and substantial impacts. Nevertheless, the apparent success of financial planning efforts and of simplification initiatives suggests that there are both private actions and public policy strategies that can influence saving behavior. There is a key role for the private sector in enhancing financial literacy and the market is responding rapidly to try to fill the void. At the same time, there is an at least equally important role for the public sector, via a campaign that revolves around a comprehensive website, and through better coordination of existing policies toward saving. We conclude that improving financial literacy should be a first-order concern for policy-makers, and that gains could accrue not only to the affected individuals, but also to their family members and society at large.

This paper presents a systematic and comprehensive meta-analysis of the literature on financial education interventions that focuses on financial education studies designed to strengthen the financial knowledge and behaviors of consumers. The analysis identifies 188 papers and articles that present impact results of interventions designed to increase consumers ’ financial knowledge (financial literacy) or skills, attitudes, and behaviors (financial capability). These papers are diverse across a number of dimensions, including objectives of the program intervention, expected outcomes, intensity and duration of the in-tervention, delivery channel used, and type of population targeted. However, there are a few key outcome indicators where a subset of papers are comparable, including those that address savings behavior, defaults on loans, and financial skills such as record keeping. The results from the meta-analysis indicate that financial literacy and capability interventions can have a positive impact in some areas (e.g., increasing savings) but not in others (e.g., reducing loan defaults). Financial education, financial literacy, meta Analysis. JEL codes: C93, D03, D14, O12, O17 A decade ago there was limited interest in the topic of financial literacy. Now this issue is at the top of the policy agenda for national regulators, international organi-zations, researchers, and private financial institutions. An important reason for the increased attention to financial literacy is the global financial crisis, which high-lighted the importance of financial knowledge and skills for consumers. Anecdotal evidence from the crisis immediately suggested that people had taken on financial products—and risks—that they did not fully understand. Empirical studies con-firmed this relationship, including Klapper et al. (2013), who utilize data from

Given the shift of responsibility for retirement planning from employers to employees, the growth of 401(k) plans, and the recent financial crisis, assessing the financial literacy of the United States ’ population has become increasingly important. However, the measurement of financial literacy is still in its infancy. The measurement of financial literacy among low-income populations is of particular concern, as they rely more heavily on Social Security benefits, and who encounter different financial decisions and financial products than upper/middle-income households. Using data from nine waves of the Health and Retirement Study (HRS), we examine whether existing measures of financial literacy are descriptive and/or predictive of successful household financial management, as well as resilience in the recent financial crisis. We find that once individual characteristics are carefully accounted for in our analysis, correct responses to many of the financial literacy questions in widespread use are not significant predictors of asset accumulation or resilience to financial shocks. Financial well-being in retirement increasingly depends on individuals’ effective management of savings and

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How does complexity affect people’s reaction to tax changes? To answer this question, we conduct an experiment in which subjects work for a piece rate and face taxes. One treatment features a simple tax system, the other a complex one. Subjects ’ economic incentives are identical across treatments. We introduce the same sequence of additional taxes in both treatments. Subjects in the complex treatment underreact to new taxes; some ignore new taxes entirely. The underreaction is stronger for subjects with lower cognitive ability. Contrary to predictions from models of rational inattention, subjects are equally likely to ignore large or small incentive changes. (JEL D14, H24, H31) We study how complexity influences choices. In particular, we analyze how the complexity of the economic decision environment influences the reaction to subsequent changes in incentives. We are motivated by the observation that existing tax and benefit systems as well as many other incentive systems and price sched-ules usually feature highly complex, nonlinear schedules with kinks, thresholds, and various exemptions. There is growing evidence that people are not able to react