A Review of Financial Behavior Research: Implications for Financial Education National Endowment for Financial Education® (NEFE®) Jing Jian Xiao, University of Rhode Island Michael Collins, University of Wisconsin Matthew Ford, Northern Kentucky University Punam Keller, Dartmouth College Jinhee Kim, University of Maryland Barbara Robles, Federal Reserve Board

National Endowment for Financial Education Introduction 2  Purpose  Financial education, behavior, and well-being  Define financial behavior  Framework of behavior development - TTM  Factors associated financial behavior  Implications for financial education

National Endowment for Financial Education Economic Factors 3  Consumers with various economic resources demonstrate a hierarchical pattern of behaviors  Risk tolerance is positively associated with resources  Limited resource consumers have different issues regarding financial behaviors  Limited resource consumers under-utilized opportunities provided by economic assistance programs  Limited resource consumers over-used subprime products

National Endowment for Financial Education Gender, Racial/Ethnic Differences 4  Gender differences are found in financial behaviors  Women are less risk tolerant than men  Gender differences are in financial socialization  Racial/ethnic differences in spending  Racial/ethnic differences in borrowing  Racial/ethnic differences in wealth building  Multiple characteristics of disadvantage populations

National Endowment for Financial Education Life-Cycle Stage Factors 5  Age differences in financial behavior and risk tolerance  Young adults have low financial literacy and need education for credit management  Tax behavior of young and limited resource consumers  Home ownership behavior of new home owners  Retirement saving behavior of all ages  Financial behavior for non-traditional families

National Endowment for Financial Education Family and Peer Factors 6  Parents are a major agent for financial socialization  Parents influence children’s norms and values  Children learn financial behaviors from parents through modeling and observation  Communication between children and parents is key in financial socialization  Three generations and financial socialization  New immigrant families and financial socialization  Peer effects on money matters are different from parental effects

National Endowment for Financial Education Financial Education Factors 7  Financial education contributes to financial behavior among youth and young adults  Financial education contributes to financial literacy among youth with mixed findings  For adults, workplace financial education contributes to financial behavior  The long term effect of financial education on behavior has mixed findings

National Endowment for Financial Education Cognitive Factors 8  Numeracy is associated with financial market participation  For aged consumers, some studies indicated financial experience overweighs decline of cognitive ability  Financial sophistication shows a reverse U-shape over the life-cycle  Propensity to plan contributes to financial behavior  Future discounting affects financial education participation  Children’s cognitive development is related to financial socialization

National Endowment for Financial Education Emotional Factors 9 Emotion affects financial behavior: threat rigidity Case: emotion explains why men are more risk seeking than women  They value different sets of emotions  Women feel emotions more intensively than men  Women use emotions for decision making more  Women acknowledge bad feelings more  Women are more sensitive to others’ needs

National Endowment for Financial Education Psychological Biases 10 Human financial behaviors are not rational as described by standard economic theory Behavioral economics literature identified many human biases Risk tolerance differs in the context of loss or gain People are overconfident in financial decisions

National Endowment for Financial Education Social Factors 11  Financial behaviors differ in cultures  News media affect financial behavior  Moral hazard affects financial behavior  Social mood and unconscious herding affect financial decisions

National Endowment for Financial Education Implication for Education Policies 12  Provide support for research on education needs  Promote a comprehensive “whole family” perspective  Encourage education at critical teaching moments  Identify needs for education vs. counseling  Integrate risk management to financial education  Need to consider moral hazard  Develop role models for desirable financial behavior  Promote evidence-based, flexible, multidimensional, and effective financial education programs

National Endowment for Financial Education Implication for Education Practices 13  Promote stage-matched, action oriented education  Provide additional education after policy intervention  Provide multiple educations during life-cycle stages  Address the need of low financially literate consumers  Include risk management concepts  Address needs of diverse cultural populations  Use multiple teaching approaches  Address gender differences in teaching  Start financial socialization for children early

National Endowment for Financial Education 14 Thanks for your attention Any questions? References are available from the paper