Wharton experts on financial literacy

The April episodes of the Wharton School’s faculty research podcast, ‘Ripple Effect,’ mark National Financial Literacy Awareness month, where experts discuss current financial initiatives for innovation, lower-income spending behavior, and how AI may help in financial literacy challenges.

Three young children holding paper money seated at a table.
Image: iStock/Wavebreakmedia

National Financial Literacy Awareness month is observed in April, and Wharton faculty have taken the opportunity to showcase their research in financial literacy, its importance, and current initiatives for innovation. “Ripple Effect,” the Wharton School’s faculty research podcast, features four installments that cover topics from high schoolers’ financial literacy and household debt to AI’s role in finance.

In “How a Philly financial literacy course is helping underserved high school students,” Wharton’s David Musto, Ronald O. Perelman Professor in Finance and director of the Stevens Center for Innovation in Finance, discusses center programs that teach high school students about financial literacy, a process he says should start when people are young.

“The course that I’m talking about is Essentials of Personal Finance. … It covers the whole range of financial issues that are relevant in their lives right now, like if you are working a check-out at a store, what is coming out of your paycheck and why? What does that get you? Where’s that going? And then student loans, which are coming up for a lot of these students right away. How do those work?” Musto asks.

“It also covers some topics that are about being an educated voter. If people say the Social Security Trust Fund is running out, well, what is that? ... When different candidates say different things about that, well, what do you like? What does that mean for you?”

Musto and his class also address at the issue of financial literacy from the perspective of other cultures. “This is something that was inspired by a financial services provider who contacted the center saying, ‘I see you have English-language material, but I have potential clients who come from countries where they speak Spanish. They are adults. They do not know very much about our financial system because they just got here, and a lot of them have had negative experiences with the financial systems in the countries where they came from,” Musto explains. “So, material is aimed at that community, helping them plug into our financial system as soon as possible and not get ripped off, and to be able to send money back to their own countries.”

In “Understanding how financial literacy affects household debt and bankruptcy,” Sasha Indarte, an assistant professor of finance, discusses her research into the effect of social safety net programs on household debt and creditworthiness, and bias in the bankruptcy process.

“I have some ongoing research that tries to both document and understand the reason behind racial disparities and the access to the debt relief that bankruptcy provides,” Indarte says.

“It’s really difficult to get at this, so we have to use a clever bit of econometrics in order to try to say something about bias. Now, the reason that it’s challenging is when you see a disparity, this could be due to unobserved variables that we’re not controlling for. For example, if Black filers have a greater risk of losing their jobs in the future, that could make it hard for them to complete some of the requirements in Chapter 13, and that might explain some of the disparities,” explains Indarte.

“The crux of our approach to overcome this is we look at differences in the Black/white dismissal gap among Black decision-makers versus white decision-makers in the bankruptcy process. ... The idea is when we do this differencing in comparing, we can net out these omitted factors, and what we’re left with is how these two groups make decisions differently.”

In “How AI in finance impacts financial literacy,” Michael Roberts, the William H. Lawrence Professor of Finance, discusses whether generative AI can help improve financial literacy. It can, he argues, but the current models aren’t sophisticated enough to serve as standalone advisers.

“AI is financially literate by any measure in practice. From that perspective, it’s impressive. But when you ask it questions such as just broad, open-ended questions like, ‘How should I save for retirement?’ ‘What should I invest in?’—and I’m sure there are regulations or restrictions on AI from becoming an unlicensed RIA (registered investment adviser)—it really doesn’t know where to begin,” says Roberts.

“What’s critical is that I don’t see AI as just a panacea. I view it as a complement and an accelerant on our path towards financial literacy, whatever that may be, or financial proficiency. In other words, I think it’s going to be critical that people recognize that knowledge of finance and financial principles are not going to go away. They are going to be paramount in order to engage successfully with AI, wherever it may be in the future.”

And in “Why is Financial Literacy Important?,” Professor Olivia Mitchell argues that it should be a lifelong education because economic factors change over time, including the amount needed for retirement.

“We see financial literacy much like other kinds of education. It takes time to learn financial concepts and to apply them, and sometimes it takes money so that you can hire someone or take a course or what have you. These are the two components that are involved in investing in that college. Moreover, that knowledge can depreciate if you don’t use it over time. There are always new financial products on the market, adjustable-rate mortgages, and so forth, so that the knowledge base needs to be continually built throughout life,” Mitchell says.

“It is definitely an educational process. Many employers are now offering financial literacy training at the workplace. Why? Because they understand that their workers are suffering financial stress due to debt.”

For a full list of podcast episodes, visit the “Ripple Effect” website.