You’d expect stakeholders in a highly-competitive, high-profit, high-risk, globalised industry to have a clear financial vision, but when the heroes of Irving Welsh’s Trainspotting are discussing what they’d do with the expected profits from a drug deal, only Spud seems to have thought it through. But although “Buy somethin’ for my Ma ” is a lovely reply, it suggests that young Murphy lacks the Financial Literacy Skills for the 21st Century.
If you think you’re smarter than the average 15 year-old, try the test they sat as part of the latest PISA round. Nearly 30,000 students in 18 OECD and other countries took the test, representing around nine million 15-year-olds. The survey was carried out because “Shrinking welfare systems, shifting demographics, and the increased sophistication and expansion of financial services have all contributed to a greater awareness of the importance of ensuring that citizens and consumers of all ages are financially literate.”
The idea was to assess “knowledge and understanding of financial concepts and risks, and the skills, motivation and confidence to apply such knowledge and understanding in order to make effective decisions across a range of financial contexts, to improve the financial well-being of individuals and society, and to enable participation in economic life”.
Of course the 15 year-olds taking the tests are already participating in economic life as consumers and (in far smaller numbers) as savers. Many of them already have a bank card, and some cards are aimed at children as young as 8. This Indian bank shows a complex mixture of nationalism, naivety and opportunism on its website, claiming that: “We strongly believe that Indian kids are the smartest in the world and will use their hard earned savings in the best possible manner.”
Indian students took part in the PISA 2012 tests, but not on financial literacy, which may help explain why the top performers in the results published today are from China. Students from Shanghai score the highest in financial literacy, on average, with a mean score of 603 points, 103 points above the OECD average. There are wide differences in average performance between the highest- and lowest-performing countries and economies: more than 75 points (a full PISA proficiency level) among OECD countries and economies, and more than 225 points across all participants.
Only one in ten students in the OECD area scores at the highest financial literacy proficiency level – Level 5. That means they can solve non-routine financial problems such as calculating the balance on a bank statement, taking into account such factors as transfer fees, and understand the wider financial landscape, including the implications of income-tax brackets.
At the other end of the scale, 15% of students, on average, score below the baseline level of performance. In describing these results, the report makes what looks like one of the most radical claims you’ll ever see in an OECD publication: “At best, these students can recognise the difference between needs and wants.” In my opinion, if we could all do that, whole sections of the economy would collapse. In fact some companies have business models based on trying to convince people with thinking difficulties that there’s no difference between the two.
What Financial Literacy Skills means though is that these students can “make simple decisions about everyday spending, recognise the purpose of common financial documents, such as an invoice, and apply single and basic numerical operations (addition, subtraction or multiplication) in contexts that they are likely to have encountered personally.”
Given that being able to count and read is important for understanding bank statements, bills and so on, it may come as a surprise that high proficiency in mathematics and reading does not necessarily signal high performance in financial literacy. Students in some countries score higher in financial literacy than their performance in mathematics and reading would predict, while students in other countries perform worse in financial literacy than you’d predict from their performance in mathematics and reading.
And while PISA has consistently shown a gender gap in mathematics and reading performance, no such difference is observed between boys’ and girls’ average scores in financial literacy in 17 out of the 18 countries and economies that took part in the survey.
Family background is important though. A “more socio-economically advantaged” student scores 41 points higher in financial literacy – the equivalent of more than half a proficiency level – than a less-advantaged student. In Shanghai, family wealth is more strongly associated with financial literacy than with mathematics performance. In Israel, New Zealand, Shanghai and Spain, family wealth is more strongly related to financial literacy than to reading performance.
You can find full details here about PISA Volume VI and the other V volumes (Fibonacci may have introduced Hindu-Arabic numerals to facilitate double-entry bookkeeping at the start of the 13th century, but we’ll stick to Roman for financial literacy in the 21st).
What do teens know about money? By Andreas Schleicher, Director for Education and Skills on the educationtoday blog