Finance & PSD Impact FEBRUARY 2017 The Lessons from DECFP Impact Evaluations ISSUE 40 Our latest note looks at how supplementary interventions can make financial education work more effectively. The ABCs of Financial Education: Experimental Evidence on Attitudes, Behavior, and Cognitive Biases Fenella Carpena, Shawn Cole, Jeremy Shapiro, and Bilal Zia Financial literacy - the ability to make Data and Study Design informed decisions regarding money - plays Our study sample included 1,300 a critical role in ensuring both the well-being urban poor households in Ahmedabad, a of households and the stability of the metropolitan city in the state of Gujarat, financial system. As financial services India. The research design consisted of four expand across the world, there are concerns main components: that many financial consumers lack the Intervention 1: Financial Education knowledge to judiciously utilize the new Two-thirds of the study sample was financial products at their disposal. randomly assigned to a comprehensive Consequently, numerous private video-based financial education program institutions, non-profit organizations, and consisting of five modules over five weeks of governments have responded by classroom engagement. The remaining one- implementing financial education programs. third of the sample was assigned to a similar However, empirical evidence on the efficacy video-based health education program to of such programs provides only mixed control for the Hawthorne effect. results, and little is known about which Intervention 2: Pay for Performance aspects of financial education initiatives Within each of the above video groups, half successfully enhance financial behavior and the participants were randomly offered a financial outcomes. "pay for performance" treatment, which We combined financial education paid them for correct answers on test with cash incentives for learning, non- questions related to their program. compulsory goal-setting, and personalized Intervention 3: Financial Goal Setting financial counseling services to study the Among participants who were assigned to attitudinal, behavioral, and cognitive financial education videos and independent constraints that can stymie the link between of other treatments, half were randomly financial education and outcomes. assigned to receive a financial goal-setting treatment, in which participants chose non- Key Research Questions binding financial goals with target dates then We aim to understand the following made visible on a calendar. two related questions: Intervention 4: Financial Counseling Finally, among participants who were 1) What barriers prevent individuals assigned to financial education videos and participating in financial education independent of other treatments, half were programs from translating financial randomly assigned to receive individualized knowledge into action? financial counseling services, in which a trained financial counselor visited the homes of 2) What mechanisms are most effective in participants to provide one-on-one financial delivering financial education advice. interventions that meaningfully improve financial behavior? Do you have a project you want evaluated? DECRG-FP researchers are always looking for opportunities to work with colleagues in the Bank and IFC. If you would like to ask our experts for advice or to collaborate on an evaluation, contact us care of the Impact editor, David McKenzie (dmckenzie@worldbank.org) Results The results show that financial knowledge improves across all treatment groups, however, the marginal impact of "pay for performance" is economically and statistically insignificant in both the short and long-run. These results indicate that participant motivation is not a critical barrier in impairing financial knowledge. The key findings on financial behavior are presented in Figure 1 below where the regression coefficients on the main outcomes of interest are plotted across the different treatment categories. The results indicate that the type and intensity of the intervention has a significant influence on key behaviors of budgeting and savings. First, financial education alone does not significantly influence any of the measured financial behaviors, however, adding goal setting and/or counseling to the mix results in markedly improved outcomes. Participants who received goal setting in addition to financial education were 6 percentage points more likely than the control group to save informally and 8 percentage points more likely to save formally at a bank. Financial counseling resulted in sustained and significant improvements in monthly budgeting and formal savings. Combining all three treatments led to significant improvements across all behaviors. Figure 1: Treatment Coefficients 0.2 *** 0.15 ** ** Coefficient Value 0.1 *** ** * Monthly Budget * Informal Savings 0.05 Formal Bank Savings 0 Financial Education Only Financial Education and Financial Education and All Three Treatments Goal Setting Financial Counseling -0.05 Treatments Policy Implications While our study corroborates previous findings that financial education alone is largely ineffective in changing financial behaviors, we find that certain small changes to financial education can strengthen the “link” between education and outcomes. Simple non-binding goals can address some of the hard-to-change financial behaviors, and financial counseling facilitates further sustained action such as opening formal savings accounts and making household budgets. For further reading see: Carpena, Fenella, Shawn Cole, Jeremy Shapiro, and Bilal Zia. (2015) “The ABCs of Financial Education: Experimental Evidence on Attitudes, Behavior, and Cognitive Biases” World Bank Policy Research Working Paper no. 7413 Recent impact notes are available on our website: http://econ.worldbank.org/programs/finance/impact