Financial Education for the Disadvantaged? A Review

Abstract

Many researchers and politicians have identified a lack of financial literacy among the disadvantaged groups of the society. Thus, unequal access to financial markets seems to be a major source of economic inequality, and tackling inequality by starting financial education initiatives seems to be a straightforward solution. However, in contrast to the popularity of financial education interventions worldwide, studies on the economic effects of those interventions report mixed results. With a focus on the effect of disadvantaged groups, we review both the theoretical and empirical findings in order to understand why this discrepancy exists. The survey highlights that it is necessary to distinguish between the concepts of financial education, financial literacy and financial behavior in order to disentangle cause and effect. To understand the heterogeneity of potential outcomes, we review theoretical explanations which address the effect of interventions across the population and over the life cycle. Looking at empirical results, we discuss the importance of potentially neglected factors such as cognitive ability, mathematical capability or numeracy, and we find that the young, the immigrants/migrants and the low-income groups obtain more attention from scholars than other disadvantaged groups. Some support in favor of financial education for the young has been detected in terms of higher short-term financial knowledge and awareness, but there is no proven evidence of improved long-term behavior after growing up. From the methodological point of view, in recent years randomized control trials (RCT) have become a popular method to evaluate the effects of financial education, in particular for studies on remittance behavior of migrants. Our review discusses some limitations of both RCTs and econometric studies which might be taken into account by future research. In sum, despite the enthusiasm of many politicians, who see financial education and financial literacy as the key to tackle the problem of financial vulnerability and economic inequality, so far, there is no clear evidence, or at least no scientific consensus, on the effectiveness of performed interventions. The constant search for effective financial education might even cost enormously such that the costs of financial education programs would outweigh potential benefits. It is perhaps true that the financial behavior of the poor is arguably more controlled by lack of aspirations such that financial policy should be directed towards behaviorally motivated anti-poverty policies or simply education in general.Electronic copy available at: https://ssrn.com/abstract=3167709 In contrast to the popularity of financial education interventions worldwide, studies on the economic effects of those interventions report mixed results. With a focus on the effect on disadvantaged groups, we review both the theoretical and empirical findings in order to understand why this discrepancy exists. The survey first highlights that it is necessary to distinguish between the conc...

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