Financial literacy can be effectively improved through financial education. A new study shows that basic financial education is even more effective if common behavioral biases related to financial literacy are addressed.
The link between low financial literacy and negative outcomes such as over-indebtedness or a low savings rate for old age is now well documented. Improving financial literacy is therefore desirable and - as many studies on the topic have shown - achievable through basic financial education.
Addressing behavioral biases
Based on these findings, two researchers from Belgium's KU Leuven University, Francisco Pitthan and Kristof de Witte, investigate whether financial education can be improved by additionally incorporating information on behavioral biases.
The researchers argue that behavioral biases related to myopia, such as the underestimation of risks in the future or short-term preferences, are associated with low financial literacy.
They hypothesize that reducing such behavioral biases should hence also improve financial literacy.
Testing the theory with a randomized control trial
To test this, the researchers conduct a randomized control trial in 42 Belgian secondary schools. They use a computer-based game to convey information related to financial literacy, as well as to behavioral biases related to myopia.
Their results confirm findings from previous studies: basic financial education has a positive effect on financial literacy. In addition, the authors show that the effect on financial literacy is even larger if basic financial education also addresses behavioral biases related to myopia. In particular, the additional information related to short-term preferences led to significantly larger positive effects on financial literacy in the experiment.
In summary, the study shows that traditional financial literacy education is even more effective if it additionally addresses behavioral biases related to financial literacy.