PISA data on financial literacy: Unanswered questions on developing financial skills for the broad student population

A few weeks ago, the results of the OECD’s PISA (Programme for International Student Assessment) module on financial literacy were revealed, with Shanghai taking top honors in this category – just as it has in the last two rounds (in 2009 and 2012) on the traditional academic curriculum (reading, math and science).
 
This is no coincidence, as the OECD results and many other studies suggest a close relationship between education levels and academic performance in math and reading comprehension and scores on financial literacy tests.
 
In the PISA report, the correlation coefficients between financial literacy scores and performance in mathematics and reading were 0.83 and 0.79 respectively across 13 OECD countries in the survey sample. For high performers like Shanghai and New Zealand, these correlations were even stronger: 0.88 for mathematics, 0.86 for reading.

While waiting for general improvement in academic performance is one path to improved financial literacy, the urgency of addressing financial skills for today’s youth has led many educators and policymakers to look for more immediate steps that can be taken, including financial education interventions at school. The PISA results, however, don’t include an assessment of the value of possible financial literacy curricula, due to the “limited and uneven provision of financial education in schools.” That factor makes comparisons across countries difficult, as described in the report.

Studies of personal-finance programs, both school-based and community-based, have offered varying evidence. In a recent study based on U.S. data, state-level financial-literacy mandates for high school were found to have no effect on financial outcomes, while additional training in mathematics was found to be linked to greater financial market participation, investment income and credit management (Cole, Paulson and Shastry 2012).
 
However, a three-semester financial education program in Brazil, which was rigorously evaluated by the World Bank, showed significant gains in several financial outcomes including savings rates (Bruhn and others, 2013). The strong performance of New Zealand and Australia in the PISA financial-literacy assessment also suggests that outreach can matter, since both countries have involved the education establishment in teaching finance together with having well-established financial literacy programs for the general population. (A New York Times article, “Learning Personal Finance as a Life Skill,”  published on July 27, 2014 discusses the PISA results and country experiences, but it does not mention the many gaps in knowledge of what works.)
 
Since many countries are considering adding financial capability to their school curriculum, it is important to understand what could account for different outcomes, beyond simply strengthening mathematical and general analytical training. 
 

• The role of psychological traits and motivation

Information does not necessarily lead to behavior change. People have to be interested, or motivated, to change, so addressing psychological factors is critical to success. The importance of psychological traits was recently highlighted by Fernandes, Lynch and Netemeyer, 2014 , who conduct a study of both “measured” and “manipulated” financial literacy, where the manipulation refers to exposure to some type of financial literacy course or intervention. Through meta-analysis they find that financial-literacy interventions explain only 0.1 percent of the variance in the financial behaviors studied, and they posit that psychological traits – such as planning behaviors and willingness to take risk (important for investments) – are more important factors for achieving positive financial outcomes such as saving money, planning a budget or managing debt. Fernandes et. al. conduct a second empirical test, using panel data, and find that psychological traits, together with numeracy, can explain most of the differences in financial behavior, with exposure to financial education not a significant factor. (It is important to note that the meta-analysis research combines very disparate types of interventions in the regressions and does not allow for analysis by variables measuring the intensity [duration] or quality of the intervention – so it leaves open questions about what may make individual financial-education activities succeed or fail.)

The findings from Fernandes et. al. on the importance of psychological traits is in line with findings from research based on the U.S. Jump$tart surveys of financial literacy among high-school students. While the authors (Mandell and Klein, 2007 ) find little evidence of generalized impact for mandated courses, they do find that students who express a motivation to learn about finance benefit from finance curricula. For people who aren’t already motivated to improve their financial skills, a variety of approaches are possible, including the use of engaging teaching materials and the design of the curriculum in a way that meets the unique needs of the target population. For example, in Brazil, the materials were colorful and were designed with cartoons and other graphics used in teen magazines. Exercises in Brazil also reflected students’ lives – such as estimating the cost of the senior trip that many students take with friends when finishing high school. 
 

• The intensity and quality of the intervention (number of hours, teacher training, parent involvement) matter.

Financial-capability interventions vary widely across a variety of factors, as documented recently by Miller, Reichelstein, Salas and Zia, 2014 ,  who perform a systematic review of the literature on financialliteracy interventions and use meta-analysis in a limited subset of the 188 papers where comparability is possible. They find that most interventions last only a few hours: 38 percent last 10 hours or less and 16 percent last only 2 hours or less; 43 percent of the studies don’t report on the number of hours, but the likelihood is that many of these interventions are also short-term activities). One-third are delivered within the space of one week. This may simply be too short a time for reinforcing concepts and delivering on sustained behavior change. (By way of comparison, the Brazil high-school program lasts 72 hours and is delivered over approximately 15 months.) Other aspects of high-quality interventions, which are discussed in the PISA report, include the importance of training teachers in financial curriculum, so they can teach it with confidence, and the critical role that parents and the home environment play in a child’s financial knowledge and skills.
 
 

• Some financial topics may be relatively easier to teach and teaching should happen when skills and information are needed.

The meta-analysis in Miller and others (2014) suggests that some topics – savings, recordkeeping and budgeting – may be easier to teach than other priorities, such as credit management. There may be several reasons for this. Savings and recordkeeping behaviors are more under the control of the individual, while problems with credit management may result, at least in part, from unforeseen problems (the loss of a job or ill health, etc.) that make it difficult to repay regardless of intention or financial knowledge. Also, savings and budgeting are skills and behaviors that can be applied by people at any age – including students – while credit is something that is generally restricted to adults and to specific needs (such as business investment or purchasing a home or other asset). Furthermore, people may distrust messages about credit more than those on savings or budgeting, as they see credit products as more clearly benefitting a financial provider – and thus are more skeptical, especially if a provider is associated with the curriculum in any way. The timing of instruction is also important: Information and skills are likely to be more effective when delivered at the time that a financial decision is being made – such as applying for a credit card, applying for a student loan or opening a savings or investment account. These are so-called “teachable moments” when attention is heightened, as the consumer is about to undertake a financial purchase, and new information can immediately be put to use.
 
Building the knowledge base

The 2012 PISA results of financial literacy provide a valuable first look at the financial knowledge and skills of high school students worldwide. Another 40 countries are expected to complete this module in 2015. In the context of what we already know about financial capability and the many issues where knowledge gaps remain, here are some suggestions for the next iteration of the survey.
 

• Include a question related to whether students have had any exposure to financial concepts and information, either in a self-standing course, a workshop or within other classes such as math.

• Include some questions related to motivation and psychological traits. Questions of these types are relatively easy and quick to answer (examples can be found in the national financial capability surveys developed at the World Bank) and may be very helpful in explaining differences in performance.

• Ask questions about use of financial services, such as whether students already have a savings account or transaction account and whether they use it regularly.

• In the medium term (2018 or 2021), return to some of the students who were tested in 2012 or 2015 to evaluate the extent to which early success with financial literacy translates into improved financial behaviors.