A Method for Evaluating the Quality of Financial Decision Making with an Application to Financial Education

May 2018

Financial literacy undoubtedly plays an important role in decision making, but the associated mechanisms are complex and mediated by a variety of factors.

Summary

Financial education aims to improve decisions by helping consumers acquire the basic knowledge and skills needed to understand financial choices. But a large and growing literature finds mixed evidence that these interventions affect behavior. This paper introduces a new method for measuring the quality of financial decisions built around a notion of financial competence. The authors also describe the potential pitfalls of typical workplace education interventions and the difficulty of detecting their deficiencies using conventional evaluation methods.

Key Insights
The lion’s share of adult financial education in the U.S. is provided in the workplace.
To motivate positive behavior change, educational interventions need to help participants internalize and operationalize conceptual financial knowledge.
Simple motivational rhetoric can lead to indiscriminate responses that benefit some participants but harm others.
Practical exercises that let people apply pertinent principles help increase financial competency more than prescriptive advice.
Methodology

The researchers conducted an experiment involving a web-based financial education intervention focused on the concept of compound interest. The experiment consisted of three stages. First, subjects watched one of four educational videos, selected at random. Second, they completed incentivized valuation tasks. Finally, they took a test on compound interest, and answered survey questions concerning the decision strategies they deployed in the second stage. Performance on the test was incentivized, and subjects knew this prior to watching the educational video.