Media Briefings

BIG BENEFITS OF FINANCIAL LITERACY: New US evidence

  • Published Date: April 2015

Having the knowledge and skills to manage one’s personal finances has big financial benefits, according to research by Georgios Panos and colleagues, to be presented at the Royal Economic Society’s 2015 annual conference. It also increases the probability of someone becoming an entrepreneur and improves their likelihood of business success.

The study examines the relationship between financial literacy and entrepreneurship using US data from the 2009 and 2012 National Financial Capability Study (NFCS). The results suggest that financial literacy increases the probability of becoming an entrepreneur by 14-32%. Financially educated people are also 25% more likely to be on higher incomes, 10-20% more likely to have savings, they have fewer debt problems and they are 20% more likely to have a pension plan.

The authors comment:

‘Recent studies have suggested that there is a limited impact of entrepreneurship training on labour market outcomes and a moderate impact of financial literacy training on both cognitive and non-cognitive aspects of economic behaviour.

‘In contrast, our results are indicative of an important role for financial literacy in the curriculum.’

The study defines financial literacy as the ability to use knowledge and skills to manage financial resources effectively at a personal level. It is more than numeracy, although numeracy is important in its own right. It includes, for example, the understanding of compound interest rates, nominal and real interest rates and financial risk diversification.

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Since the early times of Adam Smith, the figure of the entrepreneur was associated with specific unique cognitive and non-cognitive skills. Early skills investments affect both the existing skill stock and generate dynamic spillover effects later in life by making later investments more productive.

Research on entrepreneurship has emphasised the relationship between human capital and firm performance or entrepreneurial income. But recent studies examining the impact of entrepreneurship education programmes have shown insignificant impacts of entrepreneurship training on entrepreneurial intentions and on the development of cognitive skills among primary school pupils and college students.

It is thus the case that the entrepreneurship-education curriculum is largely open to investigation regarding specific components that can contribute to the development of cognitive and non-cognitive skills whose stock and spillovers can spur entrepreneurial entry and performance later in life. When it comes to the skill sets of entrepreneurship knowledge, the research literature considers training/skills such as selling, problem solving, organising and communicating as important.

This study examines the relationship between financial literacy and entrepreneurship using US data from the 2009 and 2012 National Financial Capability Study (NFCS). Financial literacy is the ability to use knowledge and skills to manage financial resources effectively at a personal level. It is more than numeracy, although numeracy is important in its own right. It includes, for example, the understanding of compound interest rates, nominal and real interest rates and financial risk diversification.

The financial literacy literature has shown relationships between financial literacy and a number of desirable facets of economic behaviour, including stock market participation, financial planning and inclusion, real estate purchases, retirement and pension planning, inter alia.

The findings of the study suggest large effects of financial literacy on the probability of being an entrepreneur, in magnitudes between 14-32%. In addition, financial literacy exerts effects of large magnitude in a number of desirable entrepreneurial performance outcomes.

Specifically, financially literate individuals are around 25% more likely to find themselves in higher income trajectories. They are 10-20% more likely to possess savings and emergency funds, including college funds for their children. The investigation further shows fewer difficulties in repaying debt, some 20% higher incidences of retirement and pension planning. Finally, financial literacy is shown to be negative related to previously unsuccessful entrepreneurial endeavours.

In view of the recent evidence showing a limited impact of entrepreneurship training on labour market outcomes and a moderate impact of financial literacy training on both cognitive and non-cognitive aspects of economic behaviour, these results are indicative of a potential role for financial literacy in the entrepreneurship education curriculum.

ENDS


‘Financial literacy and entrepreneurship’ by Leora Klapper (World Bank), Annamaria Lusardi (George Washington University) and Georgios A. Panos (University of Glasgow)