María José Roa, a researcher at the Center for Latin American Monetary Studies (CEMLA), recently presented the results of her study, “The importance of financial capabilities: an empirical analysis in the Andean region,” which was carried out with the collaboration of CAF (the Development Bank of Latin America).
The study centers on Colombia, Peru, Ecuador and Bolivia, and attempts to find out whether cognitive and non-cognitive capacities affect peoples’ financial capabilities. The results conclude that financial capabilities are defined, not only by the individual´s financial education, but also by personality traits, how they process information, their level of understanding, etc.
Financial education is a clear way to to accumulate human capital"
According to María José Roa, there are studies that show how high levels of cognitive abilities have a positive effect on financial habits, in different ways:
- The fewer financial errors one makes, the lower probability of indebtedness the individual had, or the more sophisticated were the financial products they sought access to.
- Good numerical habits also showed a direct relationship to appropriate financial decision-making.
Apart from these characteristics, personality traits also enter into play, although they cannot be measured by the tests commonly used to research financial habits. Roa believes that financial education is a clear way to to accumulate human capital. She refers to the 'model of the big five,' five broad personality factors (openness to new experiences, meticulousness, extroversion, sympathy and neurosis) that have already been studied by authors who say that personality traits and cognitive characteristics could be equally useful when predicting socioeconomic behavior. “Perhaps these empirical methodologies could allow us to identify individuals who, due to their personality, fall into non-payment, don´t save money, or participate more in the informal economy.”
As for financial education, there are authors that believe there is a correlation between financial education and successful financial decision making. However, other researchers don´t consider the correlation to be relevant, since there are factors such as cognitive characteristics and a possible problem of endogenicity between financial education and decision making, which are taken into account in the study of financial decisions. María José Roa points out the discussion centers, not only on defining what financial education is, but also in making sure it has sufficient quality.
María José Roa during her speech. | BBVA
During her research, María José Roa singled out four indicators (sociodemographic, variables, time and risk preferences, numerical abilities and financial education), which were measured in the countries being studied. The conclusions of the research are meant to help financial institutions and governments to design programs of financial education according to the socio-demographic variables of each country.
- Numerical abilities and personality traits related to meticulousness - such as the tendency to plan and to establish long-term goals, or perseverance and scrupulosity – increase the probability that an individual will save or will contract formal savings and loan products.
- The tendency to use informal savings mechanisms depends in large part on meticulousness and knowledge. This is related to the coexistence of formal and informal mechanisms across all socioeconomic levels.
- A high level of financial education lowers the probability that an individual will use exclusively informal savings methods.
- Financial education is important, both in the case of complex financial products, such as long-term credits, as in simple products such as deposits.
- Higher salary and education levels increase the probability that an individual will save and contract formal savings and credit products.
- Women and less educated individuals have a greater tendency to enter informal financial markets.
Through the Center for Financial Education and Capability, BBVA supports and promotes the knowledge of financial capabilities, as a fundamental factor with a direct impact on peoples’ wellbeing.