Financial Literacy Seminar Series Trust Financial Literacy and

Financial Literacy Seminar Series ____________________ Trust, Financial Literacy, and Financial Market Participation Jason Seligman Investment Company Institute

April 4, 2019 Trust, Financial Literacy, and Financial Market Participation Global Financial Literacy Excellence Center George Washington University Jill Fisch Jason Seligman University of Pennsylvania Law School Investment Company Institute This paper represents the authors’ views and not the views of the Presentation to. Company Institute, its staff, or member firms. Investment

Introduction – when it comes to saving & investing Changes in the structure of retirement pensions are motivating people to increase their financial market participation. Participation decisions have economic consequences. Given these facts, we ask: » What is the role of Trust in motivating/facilitating participation? » How does it compare with the role of Financial Literacy? » Do the two act in the same way or do they act differently? April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 2

Outline 1. 2. 3. 4. 5. 6. Survey & Measures Trust – background & perspective Financial Literacy – measures & thoughts Financial Market Participation – measures Results Conclusions April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 3

1. Survey & Measures April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 4

Survey & Measures Survey environment – design: Qualtrics, sample: MTurk “Experts” | user-scripts Survey development – trust: literature, our own work financial literacy: 10 questions. Big three and seven others we pre-tested. financial market participation: three measures 1. types of accounts held expands on Balloch, Nicolae & Phillip (stock mkt. ) 2. preferences for delegation versus autonomy in financial decisions 3. preferences for type of delegation human advisors versus robo April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 5

2. Trust – background & perspectives Measures in the literature and in this work. April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 6

Trust measured in several ways in the literature Many studies use some version of a General Social Survey trust question: Generally speaking, would you say that most people can be trusted or that you can’t be too careful in dealing with people? This works – trusting types are more engaged and delegate more to humans. Others measure trust with a two player game: P 1: receives five dollars and passes some to an intermediary, who triples it. P 2: receives five dollars plus the tripled P 1 money, and passes some back to P 1. We did not observe any distinguishable relationship between game-play and financial literacy or use of financial products, unlike other trust measures. April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 7

Trust in the GSS has not been on the rise evolving responses to a general trust question April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 8

How we measure Trust measures of specific types of people April 4, 2019 Trust, Financial Literacy, and Financial Market Participation I of II 9

How we measure Trust attitudes towards Wall Street and financial advisors April 4, 2019 Trust, Financial Literacy, and Financial Market Participation II of II 10

3. Financial Literacy – measures & thoughts Broadly, in the literature and as used in this work. April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 11

Financial Literacy also measured several ways in the literature We build on literature testing the efficacy of questions: • Knoll and Houts (2012) – Item Response Theory • Schmeiser and Seligman (2013) – External Validity • Lusardi, Mitchell, and Curto (2014) – PRIDIT à All ordinal ranking techniques. and work with a Mechanical Turk sample • Fisch, Wilkinson-Ryan, and Firth (2016) We evaluate the relative merit of an increasingly standard battery of survey questions as a first exercise in Mechanical Turk. Pick the ‘Big Three’ and seven others. April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 12

Trust & Financial Literacy Any relationship between them? How does age impact levels in these data? April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 13

Trust in People (composite) & Financial Literacy April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 14

Trust in financial advisors (specific person-type) & Financial Literacy April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 15

Attitudes: Wall Street and financial advisors & Financial Literacy April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 16

Trust & Age April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 17

Financial Literacy & Age April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 18

4. Financial Market Participation – measures Development of our three dependent variables April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 19

Financial Market Participation We do not ask respondents to reveal their wealth. Nor do we ask what proportion of it is invested in financial markets. For financial market participation: -i- we consider how many types of investment-capable accounts a person has {1. DC, 2. IRA, 3. SEP, 4. other retirement, 5. full-service broker, 6. discount broker. , 7. college account} Two other measures of participation: -ii- preferences for degree of delegation of investment decisions, -iii- preferences for advisors: human vs. algorithm (robo). April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 20

Financial Market Participation & Financial Literacy April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 21

Preferred Degree of Autonomy in Decision Making and Financial Literacy April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 22

Preference for Human vs. Algorithm-Based Advice & Financial Literacy April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 23

5. Results For regressions with our three financial market participation variables (number of account types, delegation, advisor preferences) w. r. t. trust and financial literacy April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 24

Results trust in: people -i- Number of account types: + Poisson trust in: weakest types -ii- Degree of delegation: Ordered Probit +, - trust in: ER, adviser , self -iii- Affinity for human (vs. robo): Ordered Probit April 4, 2019 + trust in: adviser, self market attributes financial literacy - -, + disagree fee motive + linear , sqr - assist w. complexity linear + +, - assist w. complexity disagree fee motive Trust, Financial Literacy, and Financial Market Participation linear , sqr 25

Results Summarized We find trust and financial literacy both relate to market participation. Trust: increasing trust associated with trust in others trust in ‘self’ more account types, more delegation less delegation Financial Literacy -- increases in financial literacy associated with number of account types declining then increasing delegation less delegation human advisors vs. robo increasing then declining April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 26

6. Conclusions April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 27

Conclusions: Trust: linear, positively correlated with all sorts of engagement Financial Literacy: more complex, but the relationships make basic sense One final fact about the two is interesting as well: people holding max number of account types: highest trust, lowest literacy Investments in literacy are valuable for countering naive version of trust Basic: associated with affinity for human advisors, fewer types of accounts More advanced: associated w. more account types, flexibility in type of advice April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 28

Thank You please contact us with any additional thoughts or questions Jill Fisch Jason Seligman University of Pennsylvania Law School jfisch@law. upenn. edu Investment Company Institute jason. seligman@ici. org (202)326 -5866 This paper represents the authors’ views and not the views of the Investment Company Institute, its staff, or member firms. April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 29

April 4, 2019 Trust, Financial Literacy and Financial Market Engagement 30

Fin Lit Questions April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 31

Poisson April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 32

Those with max number of account types differ April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 33

Asset-type ownership by age group April 4, 2019 Trust, Financial Literacy, and Financial Market Participation 34

Financial Literacy Seminar Series ____________________ Trust, Financial Literacy, and Financial Market Participation Jason Seligman Investment Company Institute