financial literacy (is good for sex)

The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change.

What Financial Capability?

Theory, Facts and Misconceptions

Cesira Urzì Brancati, ILC-UK


What we talk about when we talk about Financial capability

Financial Education: the process by which financial consumers/investors improve their understanding of financial products and concepts and, through information, instruction, and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being. Economic Cooperation and Development (OECD, 2005)

Financial Literacy: basic understanding of personal finance, and financial behaviour, such as saving and investing. It is a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial wellbeing (Lusardi and Mitchell, 2006)

Financial Capability: a person’s ability to manage money well, both day to day and through significant life events, and to handle periods of financial difficulty. (MAS, 2015) Individual develop more than just knowledge and skills, they als gain access to financial policies, instruments, and services (Johnson and Sherraden)


Financial Capability: Why it Matters for Retirement Income

• The responsibility for an adequate retirement income is increasingly being placed on individuals?• Are we saving enough to top up the State Pension for

retirement?• And once we enter retirement, can we make sure our

money doesn’t run out too soon? • Or rather, can we balance our consumption needs with our

desire to protect ourselves from the risk of outliving our assets?

• Many economists would argue that No, we are not saving enough, No we don’t really know how to make sure our money doesn’t run out, and No we are not very good at self insuring.

• Behavioural biases aside, we are not very good at any of those things because we are financially illiterate!


Financial Literacy Levels Very Low• Only 1 in 4 English persons aged 50+ can perform a simple calculation to

compound interest • 1 in 3 men and 1 in 6 women• And younger people know more than their older counterparts

Let's say you have £200 in a savings account. The account earns ten per cent interest each year. How much would you have in the account at the end of two years?

Proportion of men and women who gave a correct answer

Source: Own elaborations using ELSA (2008/9 to 2014/15)

Men WomenAged 50 to 60 40.5% 23.4%

60-69 31.5% 15.7%

70-79 19.4% 8.6%

80+ 13.3% 7.4%

Total 33.2% 17.8%


Who Understands Percentages?

If the chance of getting a disease is 10 percent, how many people out of 1,000 (one thousand) would be expected to get the disease?

1 in 10 older men and 1 in 5 women got this wrong


What about Fractions?

A second hand car dealer is selling a car for £6,000. This is two-thirds of what it cost new. How much did the car cost new?

68% of older men and about half the women got this right

Note: About 1 in 12 answered £18,000…


Maybe Simple Divisions?

If 5 people all have the winning numbers in the lottery and the prize is £2 million, how much will each of them get?

69% of older men and only 45% of women got this right


More correct answers = more savings

0 Correct Answers

1 Correct Answers

2 Correct Answers

3 Correct Answers

4 Correct Answers

5 Correct Answers

£0

£10,000

£20,000

£30,000

£40,000

£50,000

£60,000

£70,000

Average Household Savings

Note: 45% gave 4 or more correct answers. The results hold even if we account for age and gender.Source: Own elaborations using ELSA (2008/9 to 2014/15)


More correct answers = more likely to have planned for care

Note: 45% gave 4 or more correct answers; Planning for care includes: taking out insurance, consulting a financial advisor, started savings, bought property, other. Source: Own elaborations using ELSA (2008/9 to 2014/15)

0 Correct Answers

1 Correct Answers

2 Correct Answers

3 Correct Answers

4 Correct Answers

5 Correct Answers

0%

5%

10%

15%

20%

25%

Has taken action to plan for long term care


Ok, so people cannot count. But does it matter?

The more correct answers people give, the better their outcomes on many financial domains:

1. Are better able to manage their finances2. Shop around for the best financial products

– Choose cheaper mortgages– Buy better annuities

3. Plan for retirement4. They are more likely to participate in the stock market

– Hold better diversified portfolios, do not suffer from home bias etc.5. Are less likely to be over-indebted6. Many more…


The long road from Literacy to Capability• Numeracy is just one aspect of financial capability• OECD recently working on new ways to measure financial

capability (which they call literacy…)• Survey includes questions on:

˗ Financial Knowledge (numeracy, basic concepts related to inflation, interest compounding, risk/return, diversification etc.)

˗ Financial Behaviour (shopping around, paying bills on time, set long term goals etc.)

˗ Attitudes (short term vs. long term) • All aspects are strongly correlated• But measuring access to financial policies, instruments, and

services is trickier…


Can Financial Capability be Learnt?• Many critics argue that high financial capability is nothing but an

indicator of higher innate ability or other personal characteristics (like a taste for financial matters).

• But the impact of (measured) financial capability on financial behaviours is ambiguous• In other words, people save more and can give more correct

answers simply because they are smarter…• Or maybe people have saved more/invested better and so

they have learned the working of compound interest (etc.), rather than the opposite.

• So, do financial education programmes work?• As usual the answer is: depends…


Financial Capability: What Works?• Three large meta-analysis have concluded that:

˗ Financial education can affect some behaviours (including savings and record keeping), but not others;

˗ ‘Just in time’ interventions are more effective;˗ Courses that last only a few hours are less effective;˗ Workplace interventions or career counselling are more

effective. • There is still a lot we do not know – the UK has launched the

Financial Capability Strategy to find out what works.• But what works for some groups, may not be enough for others

˗ We have a forthcoming report on ‘What works for Older People’ …


Three Key Take-aways• A large proportion of people lack the

most basic financial capability – women and older people are especially disadvantaged

• Higher financial capability translates into better preparedness for retirement

• Increasing financial capability is possible, but we need to know what interventions really work


Financial Literacy is Good for Sex!!

Younger than 60 60-69 70-79 80+ All Ages0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Had sexual activity in the past year

0-1 Correct Answers 2-3 Correct Answers 4-5 Correct Answers


Many thanks

Cesira Urzi BrancatiInternational Longevity Centre - UK02073400440

financial literacy (is good for sex)

Lifestyle