When it comes to financial literacy, patience pays...

This is going to be short post on subject du jour – financial literacy. There are a lot of studies which look at how financial literacy is correlated to cognitive ability (here), the importance of financial literacy (here and here), levels of financial literacy in general. To paraphrase and perhaps simplify the results of much of the work done so far, there seems to be consensus that financial illiteracy is rife, that financial illiteracy causes households to have higher debt and make financial decisions that are not in their best interests (like saving while simultaneously borrowing at extremely high interest rates). However, in terms of what kinds of financial literacy training promotes better financial decisions, there is no conclusive answer. Here is one study which helps us answer part of that question at least. This study by Stephan Maier and Charles Sprenger shows that patient individuals are more likely to take up financial literacy training. More patient individuals are:

• more likely to have greater financial information
• more likely to opt for financial training sessions

One thing which I found interesting was how the authors estimate time preferences or patience for the respondents in the study. Essentially, they look at the inflexion point at which the respondent swaps from smaller payment which she receives sooner versus a larger payment which she receives later. (The questions would be would you rather have $45 today or $50 a month from now, $40 today or $50 a month from now etc.. they use these answers to then estimate individual discount factors)

An important policy related question emerging from this study: how do you create financial literacy programmes that will increase participation, not just for those who are patient but also for those are impatient (and it turns out are in greater need of financial literacy)?

As an aside, the authors also find that more patient individuals are more likely to be women, which seems to provide some concrete support, apart from all the anecdotal evidence, as to why microfinance tends to cater almost exclusively to women.