Friday, April 27, 2012

Can Vampires help us with Financial Education? Maybe.

The financial crisis of 2007-09 hurt us all but some were hit harder than others. In particular, those with weak skills in financial literacy were particularly vulnerable to mortgage brokers selling subprime loans, with adjustable interest rates (but only upwards) and massive prepayment penalties. But the key question is how to improve the financial literacy levels of consumers? The traditional methods of classroom education have only had limited success in raising financial literacy scores for those who chose to sit through the classes. One must therefore ask, “What other methods might work?”

Professor Annamaria Lusardi of George Washington University’s School of Business is setting out to answer just that question. Working with the US Federal Reserve Board, GWU has established a series of lectures and discussions on financial literacy through its Financial Literacy Seminar Series. The lecture on April 20 presented three very different approaches: (1) beefing up the rural library system in the US, (2) distributing both videos and written materials to selected households and (3) providing online games to help gamers learn better financial management skills. All three are geared towards encouraging consumers to save for the future.

The first approach of delivering financial education through the library system was tried in the state of Iowa. Professor Cynthia Fletcher of Iowa State University explained how they developed a program for rural libraries (smart investing@your library), piloting it in one library then expanding the project to 25 more libraries. They put together a user-friendly website of educational materials for users.  With support from the FINRA Investor Education Foundation, they also expanded the libraries’ finance collections, such as a subscription to Value Line which provides valuable investor research on companies. However the third area was probably the most important—they trained librarians in financial literacy. In many small towns, librarians are highly respected as source of information and advice. The thought was to give the front-line staff of the libraries key information on how to access and interpret investment information so that they could share their insights with the users of the library. The researchers noted a 14-28 percent improvement in knowledge of users--and a 53 percent increase in the confidence of all the participating librarians. Best of all, the total budget for the program was under $100,000. It appears that this was a clear winner for rural areas where libraries are an important part of the social infrastructure.

The second approach of using both written materials and videos to reach young workers was presented by Dr. Joanne Yoong of the RAND Corporation. This study was funded by the Social Security Administration through the Financial Literacy Center, and focuses on teaching five key lessons that form the foundation of financial planning for the long-term: (1) harness the power of compounding for investments, (2) understand the impact of inflation on investments, (3) diversify investment portfolios, (4) take advantage of tax-preferred investments and (5) make the most of employer-sponsored matching within your corporate-sponsored 401(k) pension program. Using simple rules of thumb, the videos were able to make clear and easy-to-remember points. The movie we saw emphasized the need to start saving early. If you begin to set aside $4,000 a year at age 21 (and can obtain a 7 percent return), you will have over $1 million by the age of 65. Starting just ten years later at age 31 requires double the amount--$8,000 each year. With stacks of $100 bills, the two actors were able to show just how effective compounding can be over a lifetime.

However it was the third approach that was the most fun. Nick Maynard of Doorways to Dreams described one of their most popular games, FarmBlitz. Their strategy is to use visual clues to motivate the users. In the game, the user inherits a farm and then learns how to borrow to buy seeds and fertilizer for the crops. Debt service is represented by bunny rabbits, which rapidly multiply over time. The farm earnings are represented by trees that grow at glacial pace. What we did not see—but is probably part of the game—is if the bunnies start to eat the crops if a player’s debt gets out of control. The D2D program also includes Bite Club, complete with vampires as disco dancers. The gamer is the manager of a vampire “day” club and needs to successfully manage her club while also taking care of personal finance matters like paying off students and saving for retirement.

D2D is testing how its games can improve the financial capability of employees, particularly around retirement savings. As the introduction to Bite Club warns, when you are a vampire, being dead can be fun. Being dead broke is something else altogether. The game has been tested with Staples in conjunction with New York Life, which provides retirement services for employees. By using product placement as part of the game of Bite Club, the game encourages employees to click on the website of Staples’s retirement funds manager and obtain more information about the savings program. In addition, at key moments, in the game, players are prompted to take real world actions to build financial capability.  The Staples pilot tests have observed strong employee response, with over 9,000 employees engaging with the game.  Most interesting, one pilot tracked that 11% of employees took a positive action in their retirement account.  You can find the games and try them out yourself at

In the meantime, Safe and Fair Finance Blog would like to thank Professor Lusardi and all of her presenters for a fascinating look into the future of financial education.
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