Innovations in consumer finance offering consumers choices in financial products have not increased consumers' ability to take advantage of these choices. Surveys show low financial literacy rates among US adults, resulting in financial mistakes that hurt consumers' financial well-being. Financial education to improve financial literacy have failed because of the false assumption that consumers are aware of the benefits of learning to make financial choices. This research project will use experimental methods to study how information on the benefits of financial education affects consumers' financial decision making. Specifically, it addresses three questions: (i) Are consumers aware of the benefits of learning? (ii) how does awareness (or lack thereof) affect financial decisions?, and (iii) How can policy-makers complement consumers' awareness using benefit disclosure with financial education to improve financial well-being? The results of this research will provide inputs into financial decision making, which will lead to efficient financial decision making, increased savings and investment, hence economic growth.
This research proposal will investigate how benefit disclosure affect consumers' financial decision making. The project first proposes a simple theoretical framework incorporating the cost of incentive perception to complement the standard costly-thinking approach. The project then tests the predictions from this framework in two experiments. The first experiment tests the precise mechanisms using incentivized choices in hypothetical controlled scenarios. This experiment manipulates three aspects of the decision environment independently: incentive levels, information about incentives, and education. While the first two variations are aimed directly at understanding the cost of incentive perception, the education treatment both links this project to existing research and more importantly, allows a test of the potential complementarity of the two information interventions. The second experiment focuses on information about incentives and education in a randomized control trial conducted. These two variations allow an investigation into the applicability of benefit disclosure and education, which are policies derived from the framework, in affecting naturalistic choices. This results of this research will improve financial decision making, increase savings and investment and economic growth.
This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.
