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How formal education may influence financial behaviour

By Abdurrahman Aydemir
Posted on August 18, 2020

So many people, so many choices - also in terms of savings and financial investments. While some individuals are net debtors, others manage to regularly put some money aside and save. Where do you channel your savings? You can invest them in the financial sector, choosing between interest bearing bank deposits, funds or the stock market. Or you may decide to stay out of the financial sector and invest your savings in gold or foreign currency cash. Both individual characteristics and the institutional context play a crucial role in these financial decisions.

Shaping financial behaviour on an individual level

Of course, the effects of certain savings and investment choices are firstly felt on the individuals and households. They influence their financial well-being and security, their ability to weather economic shocks and unexpected earnings losses, shape their economic status during retirement, and enable their entrepreneurial activities. The economic downturn due to the COVID-19 pandemic is a vivid example of such economic shocks, resulting in an unprecedented number of job and earnings losses. While governments try to help individuals through their social safety nets, the extent to which individuals can cope with such shocks is also closely related to their past savings and investment behaviour.

Most previous studies have looked into the effect of introducing financial literacy education into school curriculums and providing financial education to the general public on a big range of financial decisions. Our study, however, focuses on the role of formal education in shaping people’s financial behaviour. We opted for formal education because we believe that this form of education may affect people’s finances through various channels with potentially large effects, such as increases in earnings capacity, higher levels of cognitive skills, improved access to information relevant for financial decisions. There have been significant educational expansions across the globe, yet their implications for financial behaviour received little attention so far.

The context of our study

In our research project, we want to find out what formal education does to people’s savings and financial behaviour. We were able to take advantage of a major school reform in Turkey: in 1997, compulsory school was extended from 5 to 8 years. Within a few years, middle school completion increased substantially, by about 24.7 percentage points amongst men and 14.8 percentage points amongst women.[1] The policy also had some spillover effects, resulting in substantial increases in high school completion and college graduation.

“We found a strong positive correlation between formal education and savings propensity”

We used the ING Savings Trends Survey (Tasarruf Eğilimleri Araştırması - TTEA) data for analysis, a data set representative of the Turkish population of 18 years and older. Besides rich demographic information, the data we use includes information on savings behaviour and on the types of financial instruments used by individuals, covering the period from 2011 until 2019 and involving almost 20,000 observations.

Our data shows a strong positive correlation between education and savings propensity. This positive correlation may, however, stem from other factors. People who come from more affluent families may, for instance, be more likely to save if they benefit from income generated from family assets. Higher family income may also enable them to acquire more schooling if costs tuition, transportation and books are substantial. This would lead to a positive correlation between education and savings, although a causal channel running from education to savings may not exist.

Preliminary results and upcoming analysis

Exposure to the compulsory school reform generates exogenous changes in educational attainment of individuals that help us uncover causal relationships. Our preliminary analysis suggests that compulsory school reform does indeed have a positive effect on individuals’ savings. As the below figure shows, about 1 in 5 individuals amongst the 18- to 32-year olds have savings in Turkey. Savings propensity increases by about two percentage points for those individuals who were exposed to the school reform. Interestingly, we also find that the effect of education on savings propensity is actually much higher among women. While the effect increases savings propensity by about 2.7 percentage points amongst women, the corresponding effect amongst men is only about 1.0 percentage points.

In our ongoing analysis we explore the channels through which the positive effect of education on savings emerges. Take income: education may increase the earnings beyond subsistence level, making savings feasible. Our analysis will also explore the differences in the impact between men and women, and the effect of education on other outcomes, like propensity of financial market participation, choice between risky and safe assets, and savings towards retirement. We hope that our results will unravel the consequences of educational expansions on savings and financial behaviour, and may help development of effective interventions that aim greater financial inclusion and improve financial decisions.