Introduction: Special Virtual Issue on Developments in Financial Literacy
By Olivia S. Mitchell

In this new Special Virtual Issue on Developments in Financial Literacy, we highlight several studies published on financial literacy in the Journal of Pension Economics and Finance over the past five years. Our goal is to bring greater awareness of this important research to empirical researchers and policymakers, and we also seek to draw attention to some of the new datasets, concepts, and findings that have emerged of late. We also indicate as well a few directions for future research.

One exciting theme emerging from these studies is the fact that researchers are now using exciting new datasets collected from all over the world, to conduct studies that inform us about differences and similarities in peoples’ financial literacy. For instance, the Hastings and Mitchell (2020) piece examines survey evidence from Chile, while Yeh (2020) examines Bank of Japan data on financial literacy in that country. Boisclair, Lusardi and Michaud (2017) devise and field a new survey on both French and English-speaking Canadians, while Ricci and Caratelli (2017) explore data from the Bank of Italy. In addition, of course, there are studies using U.S. internet-based studies, specifically the UAS (Angrisani and Casanova, 2019) and the RAND ALP (Burke and Hung, 2019). While most of these studies draw on nationally-representative datasets, the paper by Clark, Lusardi and Mitchell (2017) exploits both administrative records on employee investments and an online financial literacy survey of participants in a single pension plan, namely, the US Federal Reserve Board’s defined contribution plan. Each of these datasets offers new insights into financial literacy levels and implications for behavior around the world.

A second theme is that most of the studies use either identical, or very similar, financial literacy questions in their surveys, which makes the work easier to compare and contrast. For instance, several studies including Angrisani and Casanova (2019), Boisclair, Lusardi, and Michaud (2017), Hastings and Mitchell (2020), and Ricci and Caratelli (2017), develop financial literacy indexes from questions quite similar (if not identical) to those developed by Lusardi and Mitchell (2011a,b). In contrast, Yeh (2020) uses principal component analysis to identify a subset of financial literacy concepts, having asked respondents a much-larger battery of 30 financial literacy questions. Clearly, there is more to be learned about how to balance time-sensitive short financial surveys with longer surveys that collect more information but which may have negative consequences for response rates. 

A third theme that this collection of papers highlights is that new factors are now being incorporated into empirical financial literacy studies, enriching our understanding of what might shape financial decision-making. One of these, emphasized by Burke and Hung (2019) and Ricci and Caratelli (2017), is trust. The research suggests that, if people do not trust financial entities, they may be disinclined to seek financial advice, even when they are not financially sophisticated. Another aspect of trust is over-confidence, as Angrisani and Casanova (2019) show that many who are self-confident about their financial knowledge are. In fact, less likely to be informed and less interested in learning more. Other behavioral factors have also captured researchers’ attention, including present-biasedness and loss-aversion, while yet  others (e.g., Hastings and Mitchell 2020) examine how even those who believe they can defer gratification are still be unable to carry out their best intentions when it comes to financial decisions.

A final theme to call out from this collection of studies is that researchers are devoting increased effort to disentangle the possibility of reverse causality between financial literacy and economic behaviors. There is now substantial evidence that more financially literate individuals plan more for retirement, save more, invest more in stocks, diversify their portfolios better, earn more on their investments, and are more willing to use annuities to draw down in retirement (see Lusardi and Mitchell, 2014; and Brown, Kapteyn, Luttmer, and Mitchell 2017, and many of the studies in this Special Issue). A more delicate question is whether financial literacy is co-determined with financial behavior, and here prior findings are quite convincing (Lusardi and Mitchell, 2014). In the present papers, as well, Ricci and Caratelli (2017) and Yeh (2020) undertake a range of robustness tests that buttress the contention that financial literacy is, in fact, causal.

While there is still much to be learned to better-identify how the linkages work, but there is no doubt but that financial literacy can enhance peoples’ financial decision-making. A remaining research area that is highly deserving of further work, however, is how to “get through” to people that are most in need of additional financial savvy. The Boisclair, Lusardi, and Michaud (2017) paper notes that low-income individuals are most in need of such targeted help. Yet there may be resistance, as found by Angrisani and Casanova (2019) who show that people who are most overconfident about their financial knowledge are the least interested in learning more about retirement planning or Social Security. Also thought-provoking is the study by Burke and Hung (2019), who find in an experimental setting that unsolicited financial advice does not alter peoples’ asset allocation patterns. Moreover, the fact that peoples’ lack of trust in advisors, financial institutions, and governments will tend to curtail demand for financial advice, and potentially peoples’ interest in acquiring financial literacy. 

Ultimately, the solutions proposed by these authors are diverse and worthy of further study. For instance, distrust could potentially be remedied by better certifications and requiring that advisers meet transparent fiduciary standards. There is even some evidence that asking employees to take financial literacy tests can boost pension plan participants’ equity holdings and hence, expected excess returns. Employers seeking to enhance employee financial well-being may find they need to make employees aware of their actual shortcomings, before seeking to boost their financial literacy. Finally, in addition to providing financial education, people are likely to need help curbing their present-bias and impatience.