I am switching gears a bit as I am moving more towards looking at the impact of financial instruments on household decision-making. This is not a new area of research for me, having already done some fieldwork on microfinance and consumption smoothing. Now I am getting involved in understanding microinsurance and its low levels of demand; the effect of microinsurance on risk-sharing etc.
One of the questions I am interested in is to what extent financial literacy training programs may help beneficiaries make decisions about financial instruments. Improving financial literacy is motivated by the idea that it helps households make better-informed financial decisions and contributes to their well-being. As such, financial literacy training programs have become quite popular both in the developed and the developing world.
However, as with any programs and policies geared towards promoting a certain outcome, one has to ask: is there a causal link between improving financial literacy and well-being or better financial decision-making? The evidence so far has been mixed, and here I share some with you:
Bernheim and Garrett (2003) provide evidence that people who attend financial counseling programs tend to make better financial decisions, especially those attendees with low income and education levels.
Duflo and Saez (2003), on the other hand, find only a small impact of financial education on savings decisions in a randomized evaluation at a university in the US. They randomly offered a small financial incentive to administrative staff at a university to attend an informational session on retirement products. Those receiving the incentive were significantly more likely to attend the training session, and this had only a small impact on their savings decisions, measured as enrollment in tax-deferred retirement accounts.
In another randomized evaluation, Cole, Sampson, and Zia (2009) find no effect of a financial literacy training program designed to promote savings behavior on the overall population in Indonesia. They do find a small increase in the probability that individuals with low initial levels of financial literacy open bank accounts following a short financial literacy program.
As these studies show, one major challenge in studying the impact of a financial literacy program is the design of the program itself: what should they include, how long should they be, and how should they be taught. Knowledge about this can only come from more practice, as we begin to understand what works generally and what doesn’t. For now, we can only say that the jury is still out there.
I will be adding more to this as I continue my research.