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Evaluating the quality of financial decision making

Evidence type: Insight i


There are low levels of financial literacy globally, raising doubts about the general quality of financial decision making. Financial education aims to tackle this, by helping people gain the necessary basic knowledge and skills that they need to understand the financial choices that they are faced with. However, there is a developing literature that finds mixed evidence that financial education interventions affect behaviour. There is also limited evidence on measuring the impact of financial interventions concerning financial decision making on financial competence, with no standard measurement method agreed on in the literature.

The study:

This 2017 working paper from the Global Financial Literacy Excellence Centre (GFLEC) introduces a method for measuring the quality of financial decision making built around the notion of financial competence, assessing the alignment between consumer choices and those that they may have made if they had a full understanding of the choices and opportunities available. The paper makes two main contributions:

  1. A new method for measuring the quality of financial decision making, which the authors feel is important because a rigorous analysis of the quality of financial decision making is missing from most studies of financial education, possibly due to the limitations of existing methods.
  2. Using an experiment, the potential pitfalls of previous workplace-based financial education interventions are examined, demonstrating that conventional evaluation methods may fail to highlight their deficiencies.

The paper uses advanced mathematical and econometric modelling to arrive at its conclusions, using a number of hypothetical assumptions and simulations to examine the robustness of the methods they suggest to measure the success of interventions targeting financial decision making.

Key findings:

  • The approach assesses a consumer’s willingness to accept (WTA) for equivalent claims on future income. The ‘claims’ are designed so that a knowledge of financial principles is required to understand that one claim is a simplified version of another.
  • Someone who has the required knowledge will consistently ascribe exactly the same value to both the simple and complex claims regardless of their preference. When these WTAs differ systematically, the size of the divergence produces a measure of financial competence with respect to the targeted principles, or the extent to which the consumer is exposed to decision errors.
  • The results demonstrate that this measure of financial competence indicates the extent to which a consumer’s incomplete command of the principles exposes them to financial losses.
  • As a welfare measure, the new measurement method avoids external judgements of consumers’ choices that are common in policy discussions, such as whether people are ‘sufficiently patient’ or whether they ‘save enough’.
  • The method also avoids asking participants for too much information, and the authors state the results are ‘simple, intuitive and easily implemented’.
  • Moving to the second contribution made by this paper, the researchers write how workplace-based education provides the majority of financial education to adults in the United States, with brevity being a key constraint as educational programmes are not only costly but also time consuming, making them unattractive to employers and workers.
  • Due to this brevity, the programmes try to compensate by focusing on strategies derived from previous and non-bespoke experiences, accompanied by motivational messaging. Due to the ‘one-size-fits-all’ advice, the education may not be relevant for some, and in other cases could actually be inappropriate.
  • The experimental intervention used in this paper focuses on teaching ideas of compound interest, which appears to be a highly effective example according to conventional outcome measures. However, this research finds that on average the intervention does not improve the quality of financial decision making.
  • The research concludes that while financial literacy undoubtedly plays a role in financial decision making the associated mechanisms are complex and affected by a range of other factors, such as the manner in which each intervention motivates participants, and whether it helps them to operationalize their knowledge rather than learning directional ‘imperatives’.

Points to consider:

Methodological limitations :

  • This work uses advanced mathematical modelling that appears to produce robust research findings and evidence that the measurement approach that is suggested in the research is accurate and reliable.

Generalisability/ transferability :

  • This report is of significant interest to policymakers, stakeholders and other parties interested in implementing, and measuring the success of, financial education initiatives related to financial decision making.


  • These findings are based on findings from experiments in North America, but the measurement methods could be transferred and reproduced in other countries/economies.

Key info

Year of publication
Contact information

Sandro Ambuehl, UTSC Department of Management and Rotman School of Management, University of Toronto

B. Douglas Bernheim, Department of Economics, Stanford University

Annamaria Lusardi, Global Financial Literacy Excellence Center, The George Washington University School of Business