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.