William Bosshardt, Florida Atlantic University. FINRA Investor Education Foundation, 2013 Suppose...

National Standards for

Personal FinanceWilliam Bosshardt, Florida Atlantic

University

FINRA Investor Education Foundation, 2013 Suppose you had $100 in a savings account

and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

Nation: 75% Correct, 13% Incorrect, 11% Did Not Know

Kansas: 77% Correct, 13% Incorrect, 8% Did Not Know

The Need for Financial Literacy

Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?




Buying a single company's stock usually provides a safer return than a stock mutual fund.




Undertook project of writing standards

Council for Economic Education

Why Were They Written?

To connect personal finance to basic economics uses choice, trade-offs, incentives, markets and other

economic concepts to discuss personal finance

To focus on economic decision-making for personal finance not simple recommendations

To use examples of financial decisions people face in their daily lives.

What Are the Standards?

A concise document that explains what students in the schools should know about personal finance and how to use that knowledge

The content is organized and described in the form of standards, which are important topics in personal finance.

Financial Literacy Standards

1. Earning an Income

2. Buying Goods and Services

3. Saving

4. Using Credit

5. Financial Investing

6. Protecting and Insuring

1. Earning an Income

Income for most people is determined by the market value of their labor, paid as wages and salaries. People can increase their income and job opportunities by choosing to acquire more education, work experience, and job skills. The decision to undertake an activity that increases income or job opportunities is affected by the expected benefits and costs of such an activity. Income also is obtained from other sources such as interest, rents, capital gains, dividends and profits.

Benchmarks

The benchmarks describe in detail what students should know about a standard and how to use or apply that knowledge.

144 benchmarks (average of 24 a standard)

Within a standard, they are sorted for what should be completed by 4th, 8th, and 12th grades

Distribution of Benchmarks by Financial Literacy StandardBenchmarks

Standards 4th 8th 12th Total

1. Earning an Income 9 11 8 28

2. Buying Goods and Services 7 6 7 20

3. Saving 6 9 8 23

4. Credit 4 8 13 25

5. Financial Investing 2 7 13 22

6. Protecting and Insuring 4 8 14 26

Total 32 49 63 144

Designed to be evergreen◦ No factual knowledge

Deposits insured up to $250,000◦ Mechanics not specifically addressed

How to buy a stock How to write a check

Designed to provide deep understanding

Key Things to Remember

Examples of topics / concepts found in educational materials

Related Benchmarks from the Standards

Entrepreneurs start businesses

Entrepreneurs are people who start new businesses. Starting a business is risky for entrepreneurs because they do not know if their new businesses will be successful and earn a profit.

Examples of “Deep”





Workers earn a wage The wage or salary paid to workers in jobs is usually determined by the labor market. Businesses are generally willing to pay more productive workers higher wages or salaries than less productive workers.






Workers earn a wage The wage or salary paid to workers in jobs is usually determined by the labor market. Businesses are generally willing to pay more productive workers higher wages or salaries than less productive workers.

How to write a check Choosing a payment method entails weighing the costs and benefits of the different payment options.




You should always comparison shop

People incur costs and realize benefits when searching for information related to their purchases of goods and services. The amount of information people should gather depends on the benefits and costs of the information.






What is a want and what is a need

People make choices about what goods and services they buy because they can’t have everything they want. This requires individuals to prioritize their wants.






What is a want and what is a need

People make choices about what goods and services they buy because they can’t have everything they want. This requires individuals to prioritize their wants.

Pay yourself first People choose between immediate spending and saving for future consumption. Some people have a tendency to be impatient, choosing immediate spending over saving for the future.




Credit use should be avoided at all costs

People can use credit to finance investments in education and housing. The benefits of using credit in this way are spread out over a period of time and may be large. The large costs of acquiring the education or housing are spread out over time as well. The benefits of using credit to make daily purchases of food or clothing are short-lived and do not accumulate over time.




Credit use should be avoided at all costs

People can use credit to finance investments in education and housing. The benefits of using credit in this way are spread out over a period of time and may be large. The large costs of acquiring the education or housing are spread out over time as well. The benefits of using credit to make daily purchases of food or clothing are short-lived and do not accumulate over time.

What is a stock and what is a bond

The rate of return earned from investments will vary according to the amount of risk. In general, a trade-off exists between the security of an investment and its expected rate of return.




People can buy insurance to protect themselves

By collecting a relatively small amount of money, called a premium, from each policyholder on a regular basis, the [insurance] company creates a pool of funds to compensate those individuals who experience a large loss.




People can buy insurance to protect themselves

By collecting a relatively small amount of money, called a premium, from each policyholder on a regular basis, the [insurance] company creates a pool of funds to compensate those individuals who experience a large loss.

A deductable the set amount of a loss that is paid by policyholder

Policy features such as deductibles and copayments are cost-sharing features that encourage the policyholder to take steps to reduce the potential size of a loss (claim).


Traditional economics: weigh costs and benefits and make a rational decision

Behavioral economics: sometimes humans can be influenced by things and do not necessarily make a decision based on costs and benefits◦ Rules of thumb◦ Warnings◦ Read: Kahneman “Thinking, Fast and Slow”

Behavioral Economics

Standard & Topic

GradeLevel

Benchmark Number

Benchmark

II. Buying Goods and Services

12 4 Consumers may be influenced by how the price of a good is expressed.

III. Saving 12 1 (second sentence)

Some people have a tendency to be impatient, choosing immediate spending over saving for the future.

III. Saving 12 8 Employer benefit programs create incentives and disincentives to save. Whether or how much an employee decides to save can depend on how the alternatives are presented by the employer.


Standard & Topic

GradeLevel

Benchmark Number

Benchmark


12 4 Buy 12 for $12Anchoring


Some people have a tendency to be impatient, choosing immediate spending over saving for the future.



Standard & Topic

GradeLevel

Benchmark Number

Benchmark




Time inconsistency



Standard & Topic

GradeLevel

Benchmark Number

Benchmark




Time inconsistency

III. Saving 12 8 Default bias


Standard & Topic

GradeLevel

Benchmark Number

Benchmark

V. Investing 12 10 Investors should be award of tendencies that people have that may result in poor choices. These include avoiding selling assets at a loss because they weigh losses more than they weigh gains and investing in financial assets with which they are familiar, such as their employer’s stock or domestic rather than international stocks.

VI. Protecting and Insuring

12 3 Judgment regarding risky events is subject to errors because people tend to overestimate the probability of infrequent events, often because they’ve heard of or seen a recent example.


Standard & Topic

GradeLevel

Benchmark Number

Benchmark

V. Investing 12 10 Loss aversionProspect Theory


12 3 Judgment regarding risky events is subject to errors because people tend to overestimate the probability of infrequent events, often because they’ve heard of or seen a recent example.


Standard & Topic

GradeLevel

Benchmark Number

Benchmark

V. Investing 12 10 Loss aversionProspect Theory


12 3 Difficulty judging probability


Who Will Use Them?

State DOEs: guide for developing their own standards

School administrators: for reviewing their curricula

Teachers: guide for what should be taught to students

Curriculum writers: for preparing educational material

Test developers: for assessing student learning

Researchers: for evaluating long-term outcomes

Steve Buckles, Vanderbilt University Andrew Hill, Federal Reserve Bank of

Philadelphia Bonnie Meszaros, University of Delaware Mike Staten, University of Arizona Mary Suiter, Federal Reserve Bank of St.

Louis Bill Walstad, University of Nebraska - Lincoln

The Committees: Writing

Jeanne Hogarth, Federal Reserve Board Annamaria Lusardi, George Washington

University Brigitte C. Madrian, Harvard University Peter Rousseau, Vanderbilt University Mark M. Zandi, Moody’s Analytics

The Committees: Review

Questions?

William Bosshardt, Florida Atlantic University. FINRA Investor Education Foundation, 2013 Suppose...

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