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(Thesis reading) Economic Importance of Financial Literacy (3. Measuring…

- - - - Difficult for unsophisticated investors to master
        
        impose greater risk
- - - - people would need complex financial expertise to create and follow saving & spending plans. Acquiring such knowledge cost money, time and effort.
  - - - simulate a multi-period lifecycle model (in which),
        people invest in both capital assets and financial knowledge.
        
        examine the implication toward wealth inequality and welfare.
        
        Solve Value Function for consumers with low/medium/ high educational level. Simulate 5000 life-cycles.
        
        Key predictions:
        
        optimal path for financial knowledge is hump shape.
        
        Start low, increase overtime until peak (possibly retirement), then deteriorate.
        
        People invest in financial knowledge until Marginal Cost (MC) = Marginal Benefit (MB)
        
        as people's life-cycle income profiles differ, knowledge profiles also differ.
        
        inequality in wealth and financial knowledge will arise endogenously,
        and some groups optimally have low financial knowledge level
        
        Financial education programs should not be expected to produce large behavior changes for the least educated, whose consumption needs are better insured by transfer programs (aid)
        
        It can still be socially optimal to raise financial knowledge for everyone earlier in life.
- - - - How long it would take for debt to double if one were to borrow at 20% interest rate.
  - - - Few people across countries can correctly answer all 3 basic question (1-3)
      - Adult responds are somewhat related to the country's past experience.
      - Risk diversification is the hardest concept among 3
  - - - Understand such short-coming (for future research)
      - For T/F questions, always state the false question.
- - - - scams tend to perpetrated against those with some saved asset but low financial-savviness (ex: elderly)
    - - Numerical ability was a strong predictor of mortgage default. (Gerardi, Goette, and Meier, 2013)
    - - Young adults (age 25-34) are prone to high-cost method of borrowing.
        
        fertile environment for the rise of debt default
  - - - In saving, investment
        
        in US, $100 billion worth of fees, expenses, and trading cost could be avoided by passive indexing. And since the least financially literate are unlikely to be sensitive to fees, they are most likely to bear such cost (French 2008)
        
        The financially illiterate are shown to shun the stock market, which would equal a welfare loss of 4% total wealth (Cocco, Gomes, Maenhout (2005)
        
        In Sweden, the economic cost of under-diversification would be around 3% of disposable income (Calvet, Campbell and Sodini, 2007)
        
        in Netherlands, being in the 75th vs 25th percentile of FL index equals around 80,000 EUR in term of differential net worth, and 13% point higher probability of stock market participation and retirement planning (van Rooiji, Lusardi, and Alessie, 2012)
      - In liability management
        
        sub-optimal refinancing among US home-owner result in 0.5-1% per year higher mortgage interest rate, or $50-100 billion annually (Campbell 2006). The least financial savvy are those least likely to refinance their mortgage.
        
        those with high numerical ability had about 20% lower probability of defaulting on subprime mortgage
      - Credit-card behavior
        
        In US, while less financial knowledgable cardholder constitute only 29% of cardholder population, they accounted for 42% of charges (Lusardi and Tufano, 2009a)
      - high-cost form of borrowing (Ex pay-day loan)
        
        Fail to take advantage of of other, cheaper opportunities to borrow
    - - As noted that financial literacy is associated with greater retirement planning and retirement wealth accumulation.
      - The more financially savvy will likely to be better financially endowed when they retire, better informed about pension system rules, pay lower investment fees in their retirement accounts, and diversify their pension assets. (Arenas de Mesa et al. 2008; Chan and Stevens 2008; Hasting, Mitchell and Chyn 2011)