Is Financial Literacy Worth it?

Financial literacy is a complex thing. A broad way of thinking about it is, as the skill to manage one’s financial resources in an informed manner. Defining it is simple enough. It becomes trickier when we set out trying to measure financial literacy, especially in a developing country like India where literacy alone is a huge hurdle. Numeracy is an important component of financial literacy, and is often acquired with no formal education at all. Some other related indicators are level of awareness about financial products, participation in financial transactions and the ability to plan for the future.

The survey instruments used in our project on long-term savings and pension in Satara attempt to capture many levels of financial ability. Earlier survey rounds focused on the ability to perform simple mathematical operations and tested whether respondents knew about how savings accounts accumulate interest. Consequent surveys looked at financial decision making within the household and how families foresee future expenses and the sources for funding them. After an intervention that involved some basic training about simple and compound interest, our final survey explores the presence and degree of exponential growth biases. Exponential growth bias refers to the tendency to underestimate the future value of an asset/investment by thinking in linear terms rather than in exponential terms, which is how compound interest is calculated.

Evaluation studies have, however, not yielded a definite link between financial literacy and improvements in financial decision-making. This means that we must look at financial education and hence, empowerment as a goal in itself and wait for tangible benefits, if any, to occur in the long run. One example of such an effort is the RBI’s financial education initiative using innovative graphics and narratives. The Nachiket Mor Committee Report has also emphasized on the need to make customers aware of the range of financial products available to them and which of those options would be most suitable for them. This is imperative to achieve the goal of customer protection that the report lays out as a target.

Unfortunately, experiences in developed countries are not very encouraging. Highly educated individuals with access to information about various investment opportunities do not necessarily make the right choices either. Institutional mechanisms put in place to “nudge” them in the right direction may often work much better than additional financial training. 

Regardless of the lack of power in the instrumental role of financial literacy, it still seems that a more “informed” ignorance and so a more “empowered” ignorance about these matters is a worthy goal.