How learning about behavioural biases can improve financial literacy?

Abstract

Financial illiteracy affects considerably the decision-making of individuals, leading to sub-optimal outcomes and lower financial welfare in the society. Although financial education has been demonstrated to improve financial knowledge, evidence of long-term effects is limited. This could be due to the presence of cognitive biases such as myopia, which have also been linked to poor decision-making. The main objective of this paper is to test a new theoretical framework: a behavioural-mediated mechanism of financial education in improving financial literacy not only directly, but also indirectly by increasing awareness of behavioural biases. In a randomized controlled trial among 814 secondary school students in Belgium, we test the effectiveness of course materials that aim to explicitly mitigate the myopic bias while teaching children about financial matters. The results suggests that the intervention groups had significantly better results for both the financial literacy (up to 0.67 sd) and myopia (up to 0.39 sd) post-test scores in comparison to the control condition that did not receive the materials. Using causal mediation analysis, we show that the effects of behavioural-based courses on financial literacy were significantly mediated by better awareness of myopia, which was not observed in traditional courses.