Michela Spinelli Phd Student in Economics and Finance, University of Verona, Workshop, 22° Februar 2010

 Why deal with the financial literacy  The importance of the financial literacy  Research areas and Review of the literature

Why deal with the financial literacy  evolution of the financial markets and emergence of innovative financial instruments  change in the social security system  lack of adequate financial literacy can sometimes produce disastrous effects both in the individual sphere and on the financial system  ….

The Importance of financial literacy A definition: “Financial literacy refers to the ability of consumers to make financial decisions in their own best short- and long-term interests” (Lewis Mandell, 2009)

Implementing effective financial education programs  Survey conducted in recent years in OECD countries shows that (*): 1. consumers have  low level of financial literacy  low level of understanding of the fundamentals of the economy 2. there is increasing need for financial education programs (*) See EU Commission Comunication on Financial Education, 2007

Research areas and review of the literature  Financial education in secondary schools of first and second level  Financial education and saving in the adult age  Financial literacy and participation to the stock market  Financial literacy and portfolio diversification

F Financial education in secondary schools of first and second level (1/2) E Empirical evidences on the young people in Usa : t The effectiveness in the long period of the educational programs on the financial behaviour of this group: ◦ 1° research: Berheim, Garrett, Maki (2001) ◦ 2° research: Jump$tart Coalition for Personal Financial Literacy (2007)

F Financial education in secondary schools of first and second level (2/2)  E Effectiveness of the educational programs depends on the historical context (Mandell, 2008)  K Knowledge remain "dormant" and are only used when there are sufficient resources (Mandell, 2008)

Financial education and savings in the adult age (1/3)  Surveys conducted by Lusardi and Mitchell (2006) on a sample of individuals older than 50 years show that only one third : 1.is able to make simple numerical calculation 2.knows the effects of inflation 3.knows the concept of risk diversification

Financial education and savings in the adult age (2/3)  Previous studies, conducted by Bernheim (1995,1998), Hogarth and Hilgerth (2002), and Moore (2003) support the survey by Lusardi and Mitchell.  In particular, categories with a very low financial knowledge level are women, ethnic minorities and those without a superior education.

Financial education and savings in the adult age (3/3)  Recent studies (Robert L. Clark and Madeleine d'Ambrosio, 2009) show that United States people have no (or not sufficient): ◦ ability to assess their attitude to risk; ◦ ability to make investment choices; ◦ ability to diversify the portfolio.  Lack of knowledge prevents them to establish adequate financial savings plans

Financial education and participation to the stock market  Lack of participation to the stock market is a mistake typically performed to avoid other types of mistakes (Campbell, 2006).  This mistake is more frequent in families: ◦ with low income; ◦ with awareness of their low level of financial literacy  Lack of participation has two important consequences: ◦ prevents financial innovation; ◦ raises the risk premium

Financial literacy and portfolio diversification  Possible reasons of lack of portfolio diversification: 1.transaction and research costs (Niewerburgh, Veldkamp, 2007) 2.biases in the individual behaviour (Benartzi, Thaler, 2008) 3.incapacity to identify the time investment horizon in a correct way (Magnolfi, 2006) 4.low level of financial literacy (Guiso, Jappelli, 2009) 5....

Role of the cognitive abilities and overconfidence  Dimitris, Jappelli and Padula (2008) try to explain the relation between: ◦ cognitive abilities and portfolio diversification; ◦ cognitive abilities and overconfidence; ◦ overconfidence and participation to the stock market.

Work in progress  Investigating of the role of cognitive ability and overconfidence on the decision-making and financial behaviour of young people included in 11 and 13 year of age  Formulating of a questionnaire.