Teaching the ABC of Finance

THE CHALLENGE IS TO EDUCATE YOUNG PEOPLE AND OLDER ADULTS, AND ELIMINATE GENDER DISPARITIES IN THIS AREA AS WELL. FOR THIS TO HAPPEN, FINANCIAL LITERACY MUST BECOME A POLICY OBJECTIVE IN PUBLIC WELFARE

Italy has long been characterized by low levels of financial literacy among countries with advanced economies, alas. In recent years, efforts have been multiplying to pay remedy to this, thanks also to the establishment of the Edufin National Committee, directed by Prof. Annamaria Lusardi, an international pioneer in the field of financial education, as well as a consultant for similar committees in the US. Why is this issue so socially important?

Financial education is less about the ability of the average investor to interact effectively with their financial advisor, and more about the lack of understanding of a few basic concepts in a significant part of the population, leading to financial inequalities. This contributes to the absence of individual planning in financial, insurance and pension areas. For example, to the question "Investing €100 euros at 2% for 5 years will get you €110, more than €110, or less than €110?", only 23% of adult Italians answered correctly to the question, showing that they understand the concept of compound interest rate (2020 survey of the Bank of Italy). It is thus unsurprising that most have difficulties in assessing their ability to bear the cost of one’s mortgage, to understand why it is necessary to start building a supplementary pension while you are young, and to save and invest efficiently to have guarantees of a sheltered future.

Teaching the basics of finance therefore has a fundamental social function: adopting a conscious and long-term approach to one's finances can help even weaker households withstand possible external shocks. This is all the more true for younger generations of Italians who, compared to their parents, find themselves having to face more arduous challenges: a pension system that is less generous, with a higher life expectancy; more refined but potentially more expensive health care; greater difficulty in mutual help between (fewer) children and parents, also due to greater geographical mobility; greater family instability, with separated women and men forced to deal with serious financial problems.

In Italy, a very important challenge is the financial education of young people. In recent years, the initiatives of foundations and institutions have multiplied, also thanks to the push of the Edufin Committee. The inclusion of even a limited number of lessons in basic financial education in the high school curriculum, in the context of civics or mathematics, would be decisive here. Even more ambitious would be the goal of reaching adults now outside the school system, who often do not have adequate basic skills; this is particularly true for women, with Italy unfortunately showing a particularly wide gender gap in financial literacy. As emerges from a recent study we are conducting with the research division of Consob, the Italian stock regulator, the problem for adults is aggravated by the fact that those with less financial knowledge are also less willing to learn, because they perceive less the potential benefits of knowing, or even if they perceive these benefits, they consider it too complex.

In order to create evidence-based financial education, it is important to design and implement focused interventions and rigorously measure their effects. This occurred in the context of various research/ action projects conducted by Bocconi (some of which are describe at https://bafficarefin.unibocconi.eu/edufin), also in collaboration with external donors or the Edufin Committee itself. In fact, research in this field must aim at redressing one of the most important, although neglected, sources of inequality and fragility in contemporary societies. Teaching the ABC of financial planning to even the most vulnerable citizens must therefore become a real objective for public welfare policy. For companies, it can become a key component of their social sustainability policies.

by Francesco C. Billari, Professor of Demography, and Francesco Saita, Professor of Finance