Imagine you could choose how to have your lottery winnings paid out – would you like to receive CHF 49 today or CHF 50 in a month’s time? The answer may not be as cut-and-dried as you think. Not everyone wants to wait a month for one extra franc. How about CHF 47 today or CHF 50 in a month? Maybe CHF 44 today or CHF 50 in a month? The point will eventually come when you agree to wait a month.

Precisely these questions were asked in a study by economists Stephan Meier and Charles Sprenger.[1] And the conclusions they reached regarding the relationship between people’s time preferences and the level of their economic educationhttp://www.iconomix.ch/Blog were very interesting indeed: Impatient people tend to be less inclined to improve their financial knowledge. In this instance, ‘impatient’ people are those who attach more weight to the present than to the future. Such individuals would only be prepared to wait a month if the amount paid out today was considerably lower than the amount paid out in a month’s time (e.g. CHF 22 instead of CHF 50).

The survey’s 800 participants (in Boston, USA) were not only asked to answer the aforementioned questions, they also had to participate in a real lottery. Those who won something were paid out in accordance with their time preferences. In addition, all participants were offered a free consultation with useful information on credit-related issues. Yet, only 55% took up the offer. These tended to be individuals who already had a certain level of financial knowledge. What’s more, they also tended to be the more ‘patient’ ones. In other words, in the lottery, they would have been prepared to wait longer for a smaller amount of prize money.

There is a simple explanation for this: Acquiring financial knowledge is an investment (as is education on the whole) that requires a certain amount of effort in the short term, but pays off in the long term. It is therefore more attractive to people who are more future-oriented. Having said that, we should be wary of making such generalisations based on this survey. But one important fact does stand out: Voluntary education programmes attract people with certain characteristics (e.g. those whose consumer behaviour is more ‘patient’ or financial knowledge more advanced). This allows us to draw two conclusions:

1. To attract the ‘other’ group of individuals, an education programme either needs to have an extremely low threshold or needs to be integrated into an obligatory framework, such as a school curriculum.
2. When comparing the knowledge base of participants in an education programme with that of other individuals, it is easy to overestimate the results achieved. This is because the programme participants generally have a more favourable starting point than the others. A great many evaluations fail to take this selection bias into consideration.

On behalf of the iconomix team
Michael Manz

[1] Meier, Stephan, and Charles Sprenger (2008), Discounting Financial Literacy: Time Preferences and Participation in Financial Education Programs, Working Paper.

Watch out! If you answer the following question incorrectly, you may be deemed financially illiterate.

When should you save money?
a) As soon as I turn 18.
b) Only if I have some spare money.
c) Every time I receive money.[1]

Of course, the right answer is c). And c) is wrong. There are definitely situations where it is not advisable to save money – it is precisely for situations such as these that you save money the rest of the time. You might, for instance, want to invest in an education that will pay off later on. Or you have just met the woman or man of your dreams and want to take her or him out for a romantic dinner.[2]

The above question shows two things: First, it is – despite all the studies mentioned in this blog serieshttp://www.iconomix.ch/en/service/blog/category/economic-literacy-en/ so far – not always clear what financial literacy is really all about. According to a summarywww.networksfinancialinstitute.org/... by US economist Sandra Houston on 72 surveys regarding financial literacy, more than 70% of studies did not define the term in question. Second, it is difficult to measure financial or general economic skills.

The first problem – the lack of a common basis – is the reason for the fact that very often a study examines knowledge in a specific financial area, but draws conclusions on literacy in finance as a whole. The following question on investment funds is taken from a study which is currently being carried out in Switzerland:[3]

It is actually true, but 36% thought it was false and 21% did not know. Such results led some journalists to writewww.nzz.ch/... that the Swiss greatly overestimate their financial literacy. It would have been more accurate to conclude that the respondents do not know much about specific features of investment funds.

The second problem arises in connection with the following dilemma. On the one hand, researchers would like to collect data not only on people’s knowledge, but also on their skills and behaviour. On the other hand, due to time, financial and other restrictions, surveys often consist of multiple-choice questions, which makes it difficult to draw conclusions on real situations. That is how questions on saving as the good and spending as the bad behaviour come about. To put it bluntly, one might say that when answering such questions, you can adhere to the rule that ticking something that sounds like fun makes you a financial fool.

Of course, it is easier to identify problems than to solve them. But are there no accepted standards or surveys on financial or economic skills that could be used as templates? We will look at that question in a later blog entry ...

On behalf of the iconomix team
Michael Manz

[1] From an evaluation formwww.operationhope.org/... on financial courses of the Operation HOPE organisation. It is, of course, not our intention to criticise the activities and programmes of Operation HOPE.

[2] Sometimes, it might even be advisable to incur debts. However, iconomix does as usual not take any responsibility ...

[3] Study on behalf of AXA Investment Managers, cf. press release of June 2009 (in German)smtp.market.ch/....

Predominantly male, white, foreign and from an affluent family with an academic background – such is the profile of typical senior economics students at some of the top US universities. Politically, they tend – maybe somewhat surprisingly – to position themselves towards the left. These insights stem from two surveys conducted by economist David Colander in 1985 and 2002/03 at the universities of Harvard, MIT, Princeton, Stanford, Columbia, Yale and Chicago.[1]

In the more recent survey, around 16% of the respondents referred to themselves as ‘conservative’, 24% as ‘moderate’ and 47% as ‘liberal’ (with ‘conservative’ here being equated with right-wing and ‘liberal’ with left-wing).

This alone, however, says little about the impact of an education in economicshttp://www.iconomix.ch/Blog. More revealing are the changes during the course of studies. Only 20% of the economics students surveyed registered a change in their political attitude. Within this segment, the shift from right to left was more pronounced than vice versa. This tendency, however, does not apply to all universities. Graduates from Chicago, for instance, tended to shift more to the right, those from Princeton more to the left.

A clearer trend became apparent when the university graduates of the 1985 survey were interviewed again about 15 years later [2]. Roughly 27% of these economists, most of whom were working in academia, saw themselves politically further to the right than they had 15 years earlier. 11%, by contrast, registered a shift to the left. Other replies revealed an increasingly sceptical attitude towards economic stimulus packages, redistribution and protectionism.

What fails to become clear, however, is the extent to which economic expertise influences such changes of heart, because none of these surveys included a control group. Age and general political trends may well have played an important role, too. Moreover, in view of the recent crisis, the scepticism of those elite academics towards government fiscal policies might since have diminished, and it obviously had little impact on policy decisions.

On behalf of the iconomix team
Michael Manz

[1] Colander, David (2005), The Making of an Economist Redux, Journal of Economic Perspectives 19(1), 175–198.

[2] Colander, David (2003), The Aging of an Economist, Middlebury College Economics Discussion Paper No. 03–04.