This research is supported by the Joint NSF/Private Sector Initiative and focuses on the following two closely related questions: Do individuals make reasonable financial decisions for savings and retirement? How do various forms of financial education affect financial behavior? The cooperating organization is the Smith Richardson Foundation. Numerous previous authors have documented the poor quality of personal financial decisions, and several studies have, in particular, found that Americans save too little for retirement. The adequacy of saving for retirement among younger Americans has, however, proven controversial, in large part beaause pertinent economic developments over the next 30 to 40 years are highly uncertain, and may profoundly affect retirement prospects. Previous research has also shed considerable light on the general public's level of economic and financial literacy. However, few determinants of economic literacy have been studies (aside from formal education among high school students). The determinants of financial knowledge among adults are essentially unexplored, and virtually nothing is known about the effects of knowledge on financial behavior. Finally, the existing literature has not systematically considered the effects of financial education on financial decisions; nor has it evaluated the various mechanisms (knowledge, comfort, or habituation) through which financial education may affect behavior. Thus, a central objective of this research is to examine financial education as an important dimension of human capital accumulation. The study will focus on the analysis of three extremely promising and previously unexploited data sources. The first is a series of household survey sponsored by Merrill Lynch; the second is a series of unique employer surveys undertaken by KPMG Peat Marwick; and the third is an extensive 401(k) database compiled by Hewitt Associates. The research is of direct relevance to private firms interested in using education to alter the behavior of participants in contributory retirement plans. Indeed, it bears on the continued viability of 401(k) plans, and the relative merits of defined benefit and defined contribution plans. In addition, the research has potentially important implications for national economic policy, including strategies for promoting national saving, the design and implementation of education curricula, pension policy, information policy, and securities regulation.
