Does Improving Financial Literacy Lead To Better Decisions?

We all make financial decisions in our everyday life, both big and small. But being familiar doesn’t necessarily make us experts on the topic. The fact of the matter is that managing your money and making sound financial decisions is difficult. Financial decision making is a complex beast and a full understanding of it might require much more than familiarity.

Examining financial literacy

Let’s begin with measuring your knowledge in one of the key areas of financial decision-making. Do you think the following statement is true or false: “Buying a single company stock usually provides a safer return than a stock mutual fund.”?

If you said single stock is riskier than mutual fund, you would be right. If you said you don’t know or single stock is safer than mutual fund, you are not alone. Only 52% of the respondents from a representative U.S. sample gave the correct answer to this question while 34% of them stated they do not know the answer.

This finding is not unique to the US. Although there is large variation in the percentage of participants who answered this question correctly across countries, the low percentage of correct answers is persistent. Only 14% of the Romanians, 39.5% of Japanese and 52% of Dutch answered this question correctly. The percentage of correct answers was 68% even for Swedes. This is low given that Sweden is considered as one of the most financial-savvy countries. The pattern we observe here is not unique to the risk related questions. Participants seem not to know about other financial topics such as interest rates and inflation either.

The conclusions drawn from these studies are (1) financial literacy, “the ability to use knowledge and skills to manage one’s financial resources effectively for lifetime financial security”, is low all around the world and (2) financial literacy needs to be improved in order to promote optimal financial decision-making.

How important is improving financial literacy?

The tendency has been to accept increasing financial literacy as the solution to sub-optimal financial decisions, but should we be so fast to place so much emphasis on bettering financial literacy? Think for a second about the conclusion #2. Is it is really necessary to improve financial literacy for bettie decisions? The argument could be made that increasing financial literacy via education might not be necessary for making better decisions. If you don’t know much about financial topics, getting education is not the only path to improve your decisions. You can hire a financial advisor or you can consult a friend who is competent on financial topics.

Second, it is not clear that increasing financial literacy is sufficient for making better decisions. An intervention can be quite effective at increasing financial literacy. But it might not improve financial behavior in the intended way, or even worse, it might affect it negatively. After all, gamblers know the odds are always in favor of the house, but this does not stop them from believing that they can be an exception to this rule.

Looking at the research behind financial literacy

Is improving financial literacy necessary for improving financial decisions, or might simple communication be enough?

In a lab experiment, Ambuehl, Bernheim, Ersoy and Harris (2017) showed that financial education might not be necessary for making better financial decisions. In this experiment, participants first answer a set of compound interest questions by themselves. Then, one group of participants, let’s call them “communication group”, are randomly paired with each other. They discuss how they would answer a set of compound interest questions. The pairs discuss the problems as much as they want but they do not jointly answer the questions. Another group of participants, the “contemplation group”, receive the exact same questions. They work on answering these questions by themselves. Keep in mind neither of these groups has been given financial education. After, the communication/contemplation, participants again individually answer some compound interest questions.

Communication groups did better than the contemplation group. This is evidence for that financial education might not always be necessary to achieve better financial decision-making. Communication might be just enough. Furthermore, pairs in which both parties are struggling benefit the most from communication. This indicates the importance of communication.

If improving financial literacy is not necessary for improving financial decisions, is it at least sufficient?

In another recent paper exploring this issue, Ambuehl, Bernheim and Lusardi (2017) show that a financial education intervention is effective at increasing financial literacy but it does not help people make better decisions, on average. In their lab experiment, some participants receive an education module on compound interest. Let’s call this group the “education group”. The education module included both rules of thumbs on how to do compound interest calculations and motivational rhetoric such as Einstein’s famous quote of “compound interest is the most important force in the universe”. Other participants received an education module on an irrelevant topic. This is the “no-education group”. After the modules, participants make some decisions involving compound interest. Then, they also answer some financial literacy questions. The researchers found that some members of education group did substantially better on financial literacy questions than no-education one due to the substantive content of the education module. So far so good, but what is the catch?

Well, it turned out that education did not help participants make better decisions, on average. When all of the participants of the education group were looked at as a whole, it was found that some participants end up making better financial decisions than average due to the education and some make worse decisions than average. So, on average, these effects cancelled out each other and there was no net improvement on quality of financial decisions.


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But, why did this happen? 

It all came down to Einstein. To figure out why this happened, the researchers had another experimental group that received an education module which had only substance but no motivational rhetoric. They found that there was no change in behavior in this case. So the changes in behavior that were initially observed was due to the motivational rhetoric in the education module.  The rhetoric moved all participants in the same direction regardless of their starting point. This was a good thing for the participants who initially undervalued investment opportunities. Conversely, it was a bad thing for the ones who initially overvalued the investment opportunities. Hence, we end up with this surprising result: financial education is not sufficient for better financial decisions.

To wrap up, we all hope to make good financial decisions and want to know more about how to make good decisions. Increasing financial literacy through financial education seems like a reasonable first step. But recent research shows that increasing financial literacy via education is neither necessary nor sufficient to reach this aim. So, we still have a lot to uncover.

The Game That Keeps On Giving

In this article, we shed some light on the following burning question:

How can we distinguish between altruistic donors that give without any expectation of reciprocation versus ‘warm-glow’ donors who give to receive rewards (e.g., social recognition, tax breaks) or avoid punishments (e.g., ostracism, damaged reputation)?

Game theory provides a method to morally differentiate ‘warm-glow’ givers from pure altruists. As a field of study, game theory offers a theoretical framework based on mathematical models to analyze social interactions. As such, it serves as a useful tool to study conflict and cooperation between rational decision-makers (Myerson, 1991). In a cooperation game, the payoff to each player depends on their actions. One particular game, The Prisoner’s Dilemma (see Table 1), has reliably held its own as an illustration of a novel finding. That is, what is best for one individual can be disastrous for the group.

The Prisoner’s Dilemma

Table 1. Both Prisoner A and B are suspects of a murder. They received the same offers from the public prosecutor. If both Prisoner A and Prisoner B confess to manslaughter, then they will each serve ten years in jail. If one remains quiet while the other confesses, then the snitch will get to go free, while the other will face lifetime imprisonment. If both keep quiet, then they will each face only one year in jail.

Each of the two players in the Prisoner’s Dilemma can choose to either cooperate by keeping quiet, or defect by confessing. Collectively, it would be best for both to keep quiet as they would only face one year behind bars.,  However, a key concept of game theory is that of the Nash equilibrium, which states that each individual player within a game will maximize her own utility (or make the best decision for herself) based on what he believes the other players will do. Thus, if Prisoner A believes Prisoner B will defect and confess to the authorities, he will also defect, so as to not face life imprisonment. In the Nash equilibrium, nobody can do better by unilaterally changing her strategy, as every group member is doing as well as she possibly can. Therefore, both players will defect, and the Nash equilibrium is found in the top left corner of Figure 1, confess x confess.

The Nash equilibrium was simply explained in the 2001 film A Beautiful Mind. In one scene, Nash and his friends are looking to score dates with a group of women at their Princeton campus bar. Among these women, there are a handful of brunettes and a single blonde. After each setting their sights on the blonde, one of Nash’s friends suggests that they should each go at it alone, recounting Adam Smith’s famous dictum, “in competition, individual ambition serves the common good.” Following a flash of inspiration, Nash says Adam Smith needs revision (Rey, 2008).

He continues, “If we all go for the blonde, we block each other and not a single one of us is going to get her. So then we go for her friends, but they will all give us the cold shoulder because nobody likes to be second choice. But what if no one goes to the blonde? We don’t get in each other’s way and we don’t insult the other girls. That’s the only way we win.”

In this example, the ‘no one go for the blonde’ strategy is effective because all of the players (no pun intended) end up winning. Outside the idealism of Hollywood, events are much less predictable. Without certain knowledge of agents’ preferences, we tend to hesitate in accepting the common good because the cost of cooperation can be too high or unpredictable. For this reason, we tend to strategize by prioritizing our own vested self-interests. In the case of the Prisoners’ Dilemma, keeping quiet is never a good option no matter what the other criminal chooses as there is a looming possibility that the other suspect might have talked. As such, snitching invariably avoids lifetime imprisonment.

In practice, economists use the Nash equilibrium to predict how companies respond to competitors’ prices. At the microeconomic level, this tragedy of the commons explains why we overfish seas and deplete fish stocks. A related concept is the tragedy of the commons, in which there is a scarce collective resource that must be allocated between individual actors. In the classic example, there is a “commons” on which members of a local community can let their cows graze. The issue, however, is that overgrazing will cause the land to be less productive, and thus reduce total output for the entire community. Because there is no regulation to share the benefits of the “optimal” outcome with the entire community, each individual will pursue his own personal interest at the expense of the collective good. This explains why, for example, in absence of a centralized authority, we deplete fish stocks by overfishing. Employees competitively overwork themselves to the point of exhaustion to impress their managers. We emit too much carbon into atmosphere at the expense of our collective well-being. We vehemently bicker about the space allotted to us in the work refrigerator. In cases where the commodity is unregulated and there are no clear winners, the tragedy of the commons comes into effect. Most of us may consider ourselves as altruistic persons, yet we get in each other’s way to reap individual rewards as a direct result of the formal incongruence between the singular and plural.

The Envelope Game

Hoffman, Yoeli & Navarette (2016) from Harvard University recently created the “Envelope Game,” as a modification to the well-known Prisoner’s Dilemma (Chammah & Rapoport, 1965). This game elegantly embodies a method of differentiating warm-glow donors from pure altruists. In the Prisoner’s Dilemma and other cooperation games we only know whether players choose to cooperate or defect. This is not sufficient because we are not only concerned with whether or not players cooperate but also about how they decide. We place more trust in players that never even considered defecting. The Envelope Game makes collecting this valuable information possible.

In this game, Player 1 has two choices. He can open a sealed envelope containing the information of the cost of helping, or he may simply choose not to open it. Player 2 has to observe whether Player 1 opens the envelope (i.e., whether he weighs the personal risks to benefits) or if Player 1 instinctively helps. Following this, Player 2 decides whether to continue this relationship (strong or weak tie). Theoretically, a purely altruistic person will give without ever opening the envelope, whereas a warm-glow donor will need this information to weigh risks and benefits.


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Key Takeaways for Charities

As an object of scientific inquiry, human interaction with probabilistic events is complex.

The interplay between these factors mounts up the complexity. Predicting behavior at an individual level is challenging feat in it of itself. Introducing multiple decision-makers into the mix renders prediction all the more volatile. Along a similar vein, prosocial behavior is just as nuanced. At least with advancements in game theory we know that altruists do not just to good, they do good instinctively. Charitable organizations can use this insight to segment pure altruists from warm-glow givers. If we accept this assumption, targeted marketing would become a crucial undertaking as warm-glow givers and pure altruists would necessarily respond to distinct strategies.It is likely that warm-glow givers are less concerned with the cost of cooperation if they are properly engaged. This would mean that the requests for donations should be framed to focus on empathy and social impact rather than statistical financing. Similarly, it is likely that using tactics that would be effective for warm-glow givers (e.g., publicizing donor contributions) could be detrimental to pure altruists.

Phantom Cellphone Buzzes: A Behavioral Perspective

This article originally appeared in [] and belongs to the creators.

Have you ever experienced a phantom phone call or text? You’re convinced that you felt your phone vibrate in your pocket, or that you heard your ring tone. But when you check your phone, no one actually tried to get in touch with you.

You then might plausibly wonder: “Is my phone acting up, or is it me?”

Well, it’s probably you, and it could be a sign of just how attached you’ve become to your phone.

At least you’re not alone. Over 80 percent of college students we surveyed have experienced it. However, if it’s happening a lot – more than once a day – it could be a sign that you’re psychologically dependent on your cellphone.

There’s no question that cellphones are part of the social fabric in many parts of the world, and some people spend hours each day on their phones. Our research team recently found that most people will fill their downtime by fiddling with their phones. Others even do so in the middle of a conversation. And most people will check their phones within 10 seconds of getting in line for coffee or arriving at a destination.

Clinicians and researchers still debate whether excessive use of cellphones or other technology can constitute an addiction. It wasn’t included in the latest update to the DSM-5, the American Psychiatric Association’s definitive guide for classifying and diagnosing mental disorders.

But given the ongoing debate, we decided to see if phantom buzzes and rings could shed some light on the issue.

A virtual drug?

Addictions are pathological conditions in which people compulsively seek rewarding stimuli, despite the negative consequences. We often hear reports about how cellphone use can be problematic for relationships and for developing effective social skills.

One of the features of addictions is that people become hypersensitive to cues related to the rewards they are craving. Whatever it is, they start to see it everywhere. (I had a college roommate who once thought that he saw a bee’s nest made out of cigarette butts hanging from the ceiling.)

So might people who crave the messages and notifications from their virtual social worlds do the same? Would they mistakenly interpret something they hear as a ring tone, their phone rubbing in their pocket as a vibrating alert or even think they see a notification on their phone screen – when, in reality, nothing is there?

A human malfunction

We decided to find out. From a tested survey measure of problematic cellphone use, we pulled out items assessing psychological cellphone dependency. We also created questions about the frequency of experiencing phantom ringing, vibrations and notifications. We then administered an online survey to over 750 undergraduate students.

Those who scored higher on cellphone dependency – they more often used their phones to make themselves feel better, became irritable when they couldn’t use their phones and thought about using their phone when they weren’t on it – had more frequent phantom phone experiences.

Cellphone manufacturers and phone service providers have assured us that phantom phone experiences are not a problem with the technology. As HAL 9000 might say, they are a product of “human error.”

So where, exactly, have we erred? We are in a brave new world of virtual socialization, and the psychological and social sciences can barely keep up with advances in the technology.


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Phantom phone experiences may seem like a relatively small concern in our electronically connected age. But they raise the specter of how reliant we are on our phones – and how much influence phones have in our social lives.

How can we navigate the use of cellphones to maximize the benefits and minimize the hazards, whether it’s improving our own mental health or honing our live social skills? What other new technologies will change how we interact with others?

Our minds will continue to buzz with anticipation.

One Unconscious Bias Is Keeping Women Out Of Senior Roles

This article originally appeared in [] and belongs to the creators.

Most people would not consciously decide to hire candidates based on whether they remind them of themselves.

But one unconscious bias – affinity bias – may lead people to favour candidates who are like themselves, research shows.

Affinity or similarity bias is where people seek out those who share their backgrounds, group membership, or experiences.

If hiring managers and boards of directors are made up of mostly men who unconsciously engage in such bias, it stands to reason that more men than women will continue to be hired and promoted – particularly men who share the same background with current managers. This only serves to perpetuate the cycle of men outnumbering women in leadership positions.

Gender targets, de-identifying CVs and structured interviews are but a few of the strategies that can help eliminate such bias in recruiting employees.

Affinity bias and gender equality in leadership

It is easier to take the perspective of someone who resembles your own demographic characteristics or past experiences than that of someone who has had a very different upbringing or set of experiences.

Imagine you are a doctor who worked tirelessly and at the expense of your social life to pay your own way through medical school. Now in a position to hire or promote a resident, you are likely to favour the candidates who also made their own way, and to justify your choice by saying the candidates were more qualified as evidenced by their work ethic.

In itself, the process described may not seem problematic. However, in many instances underrepresented groups may be unwittingly discriminated against in recruitment due to affinity bias.

Men hold the majority of chief executive and chair positions of Australia’s top-200 publicly listed companies. There’s also a lack of gender parityamong key management personnel in mixed and male-dominated industries.

A 2015 study found there was greater gender parity on academic journal editorial boards when the chief editor was high-performing, a younger professional and a woman (that is, 26% women on boards as compared to 16% under lower-performing and older male editors).

These findings are very promising. They suggest that younger professionals may be more used to working closely with female colleagues than older generations are. This leads them to be more likely to bypass the affinity bias, or even to see the female candidate as part of their in-group – regardless of gender.

That more women who get selected for editorial boards when a woman is editor, the more reach leadership positions. This means women will increasingly be appointed to positions that may have once been impeded by the glass ceiling.

This brings up the question of whether boards will eventually become female-dominated as a function of affinity bias by female leaders. It is certainly a possibility, if structural procedures and diversity strategies are not present and enforced.

Increasing gender parity at the highest levels matters. It is a way to break the cycle and provide visible role models to motivate other women to take on leadership positions.

How to combat it

Numerous strategies can be followed to tackle discrimination against women, and members of minority groups, as a result of affinity bias. These include:

  • implementing gender targets and quotas to increase gender equality in leadership
  • increasing awareness, which can mitigate the effects of affinity bias and other unconscious biases, through training and prompts to serve as reminders before panels meet to make hiring decisions
  • de-identifying CVs, or removing all demographic information in applicants’ resumes or other forms of submissions
  • designing and enforcing the use of structured interviews, in which all applicants are asked the same set of interview questions.

Non-structured interviews are a hot spot for affinity bias. Candidates who are like their interviewers are asked to elaborate on tangential comments, increasing their chances of ingratiating themselves.

A lack of structure during an interview also means the interviewer can make their own personal interpretations of questions that are not even relevant to the job description. Therefore, having clear and standardised guidelines to record and interpret responses during an interview is crucial.

Several programs have been put in place around the world to reduce bias in recruitment. The office of the UK prime minister launched an initiative in 2015 to reduce bias through “name-blind” recruitment. Australia’s Department of Prime Minister and Cabinet has piloted a similar intervention.

The Victorian state government has partnered with academics, industry and not-for-profit organisations to create the Recruit Smarter initiative. This aims to develop and measure the outcomes of several strategies to increase diversity at the selection and recruitment stages.

The interventions are focused on both recruitment strategies – like de-gendering the language used in job ads to ensure they appeal to all candidates – and selection strategies, including de-identifying CVs to remove any unconscious bias in decision-making that may be susceptible to details about gender, ethnicity, or even postcode.


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Fostering an inclusive and cohesive society depends heavily on providing opportunities and eliminating barriers for participation in employment and leadership to all – irrespective of their gender, disability status, age, sexual orientation, ethnicity, religious interests, political affiliation, socioeconomic status, or postcode.

There’s enough evidence of the positive impact of reducing bias in employment and the different mechanisms we can use toward this end. It ought to be acted on.