Video: Financial literacy, capability and well-being


Elaine Kempson: Thank you and good morning. Thank you very much for inviting me back to Toronto. I must say you’ve done a pretty poor job with the weather.


It was lovely when I arrived late Friday afternoon and it’s gone downhill ever since. However I won’t hold that against you. As Lucie said, individuals in our societies across the world are facing more and more complex choices in relation to their finances as the states roll back the provision that they make and individuals are expected to make provisions for themselves.

Moreover financial services themselves have been developing to this other more complex marketplace for individuals to negotiate. It’s against this backdrop that we’ve seen the developments we’re going to be talking at least in this session, I guess for the whole of these two days.

In the last 10 to 15 years we’ve been on a very interesting journey both in terms of thinking and in terms of practice, a journey that’s much more than a semantic one. We’ve moved from financial literacy in the very early days through to financial capability and now more recently financial wellbeing. That’s what I would like to focus on in this first session.

If we start with financial literacy, the traditional approach in the early 2000’s was one which had a focus primarily on knowledge and a little later on skills as well and a belief that financial literacy can be taught in the classroom. It was a didactic approach. People who were seeking to measure financial literacy in populations adopted what we researchers call a normative approach.

In other words, they decided what ordinary citizens ought to know and then went out to measure whether they actually knew it. There was nothing empirical in it and nor was there much of a consensus about what ought to be measured. Those very early surveys came up with a single number. It was a single measure of financial literacy based on how many right answers you got in those very simplistic questionnaires.

That was where we started from and that was now 15 years ago. We’ve come an awful long way since then. The critique of this approach came from policy makers and it also came from academics and particularly from the behavioural economists sitting in this hall. I’m sure a lot of the thinking came out of this institution as well, a criticism that knowledge and skills shouldn’t be seen as an end in their own right, lots of evidence that people knew all the right things.

They knew what they should be doing and still did the wrong ones. There was a feeling that the primary concern should be on consumer behaviour not least because the evidence of the impact of knowledge on behaviours was mixed at best and very often we could see very little correlation. Indeed it wasn’t even easy to see which way the causality was running.

Were people exhibiting behaviours because they got hired at better levels of knowledge or did they acquire that knowledge through the behaviours they were engaging in? This was the critique at the time and also a very strong case being made that behaviourism largely influenced by factors that can’t be taught. We have inbuilt behavioural biases. Psychologists call them psychological traits, two different disciplines, economics and psychology but basically the same thing is being talked about with different labels.

They’re also influenced by beliefs and by social norms. We don’t exist in isolation. We all operate in the societies in which we live and are moulded by those societies. I hear many criticisms of young people being particularly feckless and I think it behoves us all to realize that if we were young now we would be behaving in just the same way.

Also of course behaviours are affected by the environment in which we live, the environment in which consumption is king, where advertising is Black Friday, Cyber Monday all designed to encourage us to spend recklessly and to borrow in order to spend. This critique gave rise to the new concept of financial capability led at first by the UK regulator, the then Financial Services Authority back in 2005.

We have Nick who’s now the head of research from the successor body but the head of the research department of the FSA came to me and said we want to carry out a survey to measure levels of financial capability in the UK. Can you design us a questionnaire? And I said “Well we can give it a try. How do you define financial capability?”

He said well that’s the problem, you see, we can’t define it. So I took a deep breath and said you want me to go out and measure something you can’t even define, okay, that’s a bit trickier but let’s go back to basics. We started with a lot of qualitative research asking ordinary citizens all ages, all income levels, define a financially capable person to me. Define an incapable person to me.

They weren’t necessarily mirror images of one another. The results were extremely interesting. That approach was adopted by Canada quite soon afterwards and by a number of others as well. Subsequent to that it was picked up by the World Bank and developed for low and middle income countries.

We refined the questionnaires but went right back to first principles again and conducted would you believe across nine countries 120 focus groups, the biggest number I’ve ever had to do but we needed a large number across a swathe of countries, across continents to understand what financial capability meant if you lived in a low income country. It may not be the same thing.

In fact miraculously it was almost identical to what people – low income populations of the UK and Canada had been saying, remarkably similar so very common threads. The focus is on behaviour and the factors that influence them. People were telling us in very graphic terms and they were saying the factors that influence them include environmental ones as well as individual factors, things to do with the individual but things to do with the society and the environment in which they operate.

It was essentially a qualitative approach as you can tell from that vast amount of not only large numbers of focus groups but huge numbers of cognitive interviews to test the survey instruments both in the UK – actually we repeated I think in Canada. We certainly did in Ireland when I worked there and with the World Bank we did lots of cognitive testing, really fascinating, across different cultures.

You can’t ask people about being able to resist temptation in Catholic countries apparently. In South American countries are humorous images of the devil so we had to abandon some well-trodden questionnaires on the psychological literature trying to apply this from Uruguay through Tanzania to Papua New Guinea was the biggest challenge I’ve ever had in my life but one I enjoyed enormously, fabulous teams we worked with.

It became clear from all that analysis that we weren’t talking about a single concept but a number of loosely connected behaviours. There was agreement about how this should be measured. People were buying into the consensus what sort of things make a capable person, what makes an incapable one. There was also quite clear that behaviours mainly were driven by attitudes and personality and were less amenable to formal education.

The critique of this was started by a colleague of mine then at the World Bank who kept saying to me why are we doing this. Why does it matter? Why does any of this matter? I kept saying just shut up Robert, shut up. I’ve got enough problems.


I’m trying to deal with these nine countries. Have you tried doing fieldwork in Papua New Guinea? It’s nigh on impossible. Women had to make their own raft to come down the river during our focus group so I just kept shutting him up but it kept reverberating in my own mind. The critique of this approach is mine of my own work and frankly I got it wrong. In the analysis I got it wrong.

What I was doing was confounding capable behaviours with capable outcomes because people would describe a capable person in terms of what they did but also what they achieved. Once I had that light bulb moment it led me to rethink all I had been doing. I realized I needed to separate out the behaviours which are financial capability, the capable behaviours from the outcomes which I believe is financial wellbeing, financial wellness.

We needed to look to see what was ultimately driving financial wellbeing because Robert was quite right. Why are we doing all of this? We’re doing it because we believe that people’s financial wellbeing will be enhanced by it. We do need to understand what is driving it and let’s forget all this dichotomy between literacy – it is knowledge, is it attitudes, is it behaviour.

Let’s test it all empirically and that’s what the new wave of surveys did. I went back to all the scripts I had from the UK, from Ireland and from the World Bank studies and reanalyzed them to separate out the outcomes from the behaviours and the other factors and grouped them. That’s stage two, being able to reach all your current needs comfortably with a clear margin, not just subsistence but having resilience to maintain that in the future, in other words, a set of outcomes.

It was also clear from the qualitative research that these outcomes are determined by the interplay between a range of factors including behaviours, knowledge and skills, attitudes, motivations, behavioural biases but also importantly a range of environmental and economic factors.

I should also say I’m claiming total credit for that and I shouldn’t. I was working very closely with people working at the CFPB in the US who were conducting their own qualitative research to explore what is financial wellbeing. We agreed to work very closely together but to do our work independently and then see what resonance there was between the two sets of findings.

There was almost a complete match. We realized what we had each come up with was the same conceptual framework. Their definition differs very little from the one that I’ve got on this slide here. Their approach differs very little as well. Our working definition – I should say at this stage I was working with colleagues in Norway.

Why Norway people ask me? Why would they be worried? The simple answer is they have money. They have a ministry that was prepared to put their developmental money into doing this and Christian Poppe who I’ve worked with for about 25 years but on this for the last 3 to 4 years intensively. He was able to unlock this money and persuaded we should start exploring these ideas empirically and building conceptual models, more academic than I’ve been in the past.

I was more quick and dirty, let’s get on, get the results before. Definition of financial wellbeing is being able to meet all one’s current commitments, to do so comfortably and having the financial resilience to maintain that in the future. I think few of us would refute that very simple definition. Christian and I also came up with this conceptual model to help us think about how we might approach the analysis. It was based on the qualitative research which was telling us that the prime drivers of financial wellbeing are behaviours on the one hand and these environmental factors on the other and the socioeconomic environment in which individuals operate.

Those behaviours would be driven largely the qualitative research said by financial attitudes, behavioural biases, personality traits and confidence. The personality traits would be feeding into those attitudes. Knowledge and experience people were telling us in the focus groups was likely to be secondary and were giving us many examples of where people knew what to do and still did the wrong thing and also equally had very little education, PNG people were totally illiterate let alone innumerate and yet they were still managing their money extremely well.

It was a more complex relationship that we had to deal with. We surmised it would have an effect and indeed it does have an effect but it can be overridden by attitudes and personality. To the international measurement of financial wellbeing and capability, the survey as I said was developed in Norway in 2016-2017. The ministry liked it. I must say they still don’t know what to do with it but they like the survey.

They gave us more money to repeat it. Normally you wouldn’t bother repeating every year because things don’t change much but we could see deficiencies in the questionnaires so this was a God given opportunity to improve on the survey instrument which we did. The most recent one was conducted late 2017. The questionnaire includes questions to capture all the various levels in the conceptual model.

We ended up with – I should explain. We had the very detailed questionnaire though it doesn’t take that long and can be administered online but we used principal components analysis to identify underlying measures. We ended up with four measures of financial wellbeing, eight behaviours and four on money use, four on money management as well as different aspects of knowledge, personality traits and a range of other factors.

The first two countries to pick up the work I was doing were Australia and New Zealand. I have worked quite extensively in Australia over the years, very closely with ANZ Bank who had spearheaded a lot of work in finance, a lot of work in Australia even before the government regulator had any interest at all. Unknown to me they also fielded it in New Zealand so that came as a surprise to me when they presented me with the two reports.

The third country to pick it up was Ireland. They had approached me to repeat a survey I’d done in 2006 on capability and I explained that thinking had moved on. They will be publishing in two weeks’ time. It’s taken them an age to get it through the procedures of the Irish government. Most recently Canada, and congratulations you overtook them. You started later.

In fact we couldn’t start your work until we had completed the Irish and yet they’re not publishing for another two weeks. We’ve got a wealth of internationally comparable data for the first time in my career. I’ve been able to collect really good data, well actually the second time. The World Bank gave me that opportunity across low and middle income countries.

Now we’ve got some to my mind much improved data and we have some fascinating and valuable findings as you’re going to find out in the next session. Thank you very much.


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