Lusardi, Annamaria
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Publication Financial Sophistication in the Older Population(2012-02-01) Lusardi, Annamaria; Mitchell, Olivia S; Curto, VilsaThis paper examines data on financial sophistication among the U.S. older population, using a special-purpose module implemented in the Health and Retirement Study. We show that financial sophistication is deficient for older respondents (aged 55+). Specifically, many in this group lack a basic grasp of asset pricing, risk diversification, portfolio choice, and investment fees. Subpopulations with particular deficits include women, the least educated, persons over the age of 75, and non-Whites. In view of the fact that people are increasingly being asked to take on responsibility for their own retirement security, such lack of knowledge can have serious implications.Publication Americans’ Financial Capability(2011-09-01) Lusardi, AnnamariaThis report aims to shed light on the causes of the financial crisis by looking at the following question: How financially capable are Americans? If people are ill-equipped to make financial decisions, there can be consequences for the individuals themselves and for the economy as a whole. A new survey fielded in the summer of 2009 provides timely insights on this important topic. Financial capability is measured in terms of how well people make ends meet, plan ahead, choose and manage financial products, and possess the skills and knowledge to make financial decisions.Publication Optimal Financial Literacy and Saving for Retirement(2011-09-01) Lusardi, Annamaria; Michaud, Pierre-Carl; Mitchell, Olivia SRecent studies show that financial literacy is strongly positively related to household wealth, but there is also substantial cross-sectional variation in both financial literacy and wealth levels. To explore these patterns, we develop a calibrated stochastic life cycle model which features endogeneous financial literacy accumulation. Our model generates substantial wealth inequality, over and above what standard lifecycle models produce. This is due to the fact that higher earners typically have more hump-shaped labor income profiles and lower retirement benefits which, when interacted with the precautionary saving motive, boosts their need for private wealth accumulation and thus financial literacy. We show that the fraction of the population which is rationally “financially ignorant” depends on the level of labor income uncertainty as well as the generosity of the retirement system.Publication Exploring the Risks and Consequences of Elder Fraud Victimization: Evidence from the Health and Retirement Study(2018-12-01) DeLiema, Marguerite; Deevy, Martha; Lusardi, Annamaria; Mitchell, Olivia SThis is the first study to use longitudinal data to explore both the antecedents and consequences of fraud victimization in the older population. Because older persons are close to or past the peak of their wealth accumulation, they are often the targets of fraud. This paper reports on analysis of the Leave Behind Questionnaires (LBQs) fielded on Health and Retirement Study (HRS) respondents over three survey waves in 2008, 2010, and 2012. We evaluate the demographic determinants and risk factors of reporting financial fraud victimization in the survey, and explore whether there are demographic subgroups of older victims. In addition, we examine the financial, physical and psychological consequences of fraud. Overall results suggest that there is no single reliable predictor of fraud victimization across all three LBQ samples. When LBQ responses were pooled across survey years, we found that younger, male, better-educated, and depressed persons reported being defrauded significantly more often. Victimization was associated with lower non-housing wealth in the combined sample controlling for other factors, but had no measurable impact on cognitive, psychological, or physical health outcomes. Future research should examine predictors and outcomes based on the type of financial fraud experienced and the amount of money lost.Publication Assessing the Impact of Financial Education Programs: A Quantitative Model(2018-04-30) Lusardi, Annamaria; Michaud, Pierre-Carl; Mitchell, Olivia SPrior studies disagree regarding the effectiveness of financial education programs, especially those offered in the workplace. To explain such measurement differences in evaluation and outcomes, we employ a stochastic life cycle model with endogenous financial knowledge accumulation to investigate how financial education programs optimally shape wealth accumulation, financial knowledge, and participation in sophisticated assets (e.g. stocks) across heterogeneous consumers. We then apply conventional program evaluation econometric techniques to simulated data, distinguishing selection and treatment effects. We show that the more effective programs provide follow-up in order to sustain the knowledge acquired by employees via the program; in such an instance, financial education delivered to employees around the age of 40 can raise savings at retirement by close to 10%. By contrast, one-time education programs do produce short-term but few long-term effects. We also measure how accounting for selection affects estimates of program effectiveness on those who participate. Comparisons of participants and non participants can be misleading, even using a difference-in-difference strategy. Random program assignment is needed to evaluate program effects on those who participate.Publication Understanding Debt at Older Ages and Its Implications for Retirement Well-being(2018-10-24) Lusardi, Annamaria; Mitchell, Olivia S; Oggero, NoemiWe use data from the 2015 National Financial Capability Study to analyze debt close to retirement. We show people carry many types of debt late in their lifetimes, and these types of debt are differently linked to measures of financial distress such as having too much debt or being unable to face a financial shock. Accordingly, it is important to be able to disaggregate debt to investigate reasons why individuals carry debt close to retirement. We show that lack of financial literacy, lack of information, and behavioral biases all help explain the prevalence of debt later in life. Our evidence indicates that debt at older ages can may negatively influence retirement wellbeing.Publication Financial Knowledge and 401(k) Investment Performance: A Case Study(2015-06-01) Clark, Robert; Mitchell, Olivia S; Lusardi, AnnamariaWe explore whether investors who are more financially knowledgeable earn more on their retirement plan investments compared to their less sophisticated counterparts, using a unique new dataset linking administrative data on investment performance and financial knowledge. Results show that the most financially knowledgeable investors: (a) held 18 percentage points more stock than their least knowledgeable counterparts; (b) could anticipate earning 8 basis points per month more in excess returns; (c) had 40% higher portfolio volatility; and (d) held portfolios with about 38% less idiosyncratic risk, as compared to their least savvy counterparts. Our results are qualitatively similar after controlling on observables as well as modeling sample selection. We also examine portfolio changes to assess the potential impact of the financial literacy intervention. Controlling on other factors, those who elected to take the Financial Literacy survey boosted their equity allocations by 66 basis points and their monthly expected excess returns rose by 2.3 basis points; no significant difference in volatility or nonsystematic risk was detected before versus after the survey. While these findings relate to only one firm, we anticipate that they may spur other efforts to enhance financial knowledge in the workplace.Publication Understanding Debt in the Older Population(2020-12-10) Lusardi, Annamaria; Mitchell, Olivia S; Oggero, NoemiPoor financial capability can erode well-being in later life. To explore debt and debt management among older Americans, age 51-61, we designed and analyzed a new module in the 2018 Health and Retirement Study along with information from the 2018 National Financial Capability Study. Even though this group should be at the peak of their retirement saving, it nevertheless carries debt due to student loans and unpaid medical bills; having children also contributes. By contrast, the financially literate have more positive financial perceptions and behaviors. Specifically, being able to answer one additional financial literacy question correctly is associated with a higher probability of reporting an above average credit record and planning for retirement. Higher financial literacy is also linked to being less likely to carry excessive debt, being contacted by debt collectors, and carrying medical debt or student loans, even after accounting for a large range of demographics and other characteristics. Evidently, financial knowledge can help limit debt exposure at older ages.Publication The Economic Importance of Financial Literacy: Theory and Evidence(2013-03-01) Lusardi, Annamaria; Mitchell, Olivia SIn this paper, we undertake an assessment of the rapidly growing body of research on financial literacy. We start with an overview of theoretical research which costs financial knowledge as a form of investment in human capital. Endogenizing financial knowledge has important implications for welfare as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little) people know and identify the least financially savvy population subgroups. This is followed by an examination of the impact of financial literacy on economic decision-making in the United States and elsewhere. While the literature is still growing, conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps. A final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy.Publication Financial Fraud among Older Americans: Evidence and Implications(2018-07-10) DeLiema, Marguerite; Deevy, Martha; Lusardi, Annamaria; Mitchell, Olivia SThe consequences of poor financial capability at older ages are serious and include making mistakes with credit, spending retirement assets too quickly, and being defrauded by financial predators. Because older persons are at or past the peak of their wealth accumulation, they are often the targets of fraud. Our project analyzes a module we developed and fielded in the 2016 Health and Retirement Study (HRS). Using this dataset, we evaluate the incidence and risk factors for investment fraud, prize/lottery scams, and account misuse, using regression analysis. Relatively few HRS respondents mentioned any single form of fraud over the prior five years, but nearly 5% reported at least one form of investment fraud, 4% recounted prize/lottery fraud, and 30% indicated that others had used/attempted to use their accounts without permission. There were few risk factors consistently associated with such victimization in the older population. Fraud is a complex phenomenon and no single factor uniquely predicts victimization. The incidence of fraud could be reduced by educating consumers about various types of fraud and by increasing awareness among financial service professionals.