Trust, Financial Literacy, and Market Participation: Role Comparison

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 Investment Company Institute, its staff, or member firms.

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? 2 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

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

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

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 5 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

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

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: P1: receives five dollars and passes some to an intermediary, who triples it. P2: receives five dollars plus the tripled P1 money, and passes some back to P1. We did not observe any distinguishable relationship between game-play and financial literacy or use of financial products, unlike other trust measures. 7 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

Trust in the GSS has not been on the rise evolving responses to a general trust question 70% cannot trust 60% 50% 40% can trust 30% 20% 1972 1975 1978 1983 1986 1988 1990 1993 1996 2000 2004 2008 2012 2016 Data: NORC General Social Survey, accessed on line 1/10/2019 https://gssdataexplorer.norc.org/variables/441/vshow 8 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

How we measure Trust I of II measures of specific types of people Tend to trust them Neutral Find it hard to trust them 4.0 4.0 3.5 3.4 2.9 2.5 2.4 3.1 1.9 9 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

How we measure Trust II of II attitudes towards Wall Street and financial advisors More trusting Neutral Less Trusting 2.3 4.0 2.7 4.3 3.3 Wall Street is stacked against the average investor ( - ) Advisors help clients with complex products Advisors offer complex products to justify high fees ( - ) It is good to give advisors your financial information Average 10 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

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

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 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. 12 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

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

Trust in People (composite) & Financial Literacy N 5 160 140 4 120 level of trust 100 3 neutral level of trust 80 2 60 40 1 20 0 0 2 3 4 5 6 7 8 9 10 score on financial literacy quiz 14 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

Trust in financial advisors (specific person-type) & Financial Literacy N 5 160 140 4 120 level of trust 100 3 neutral level of trust 80 2 60 40 1 20 0 0 2 3 4 5 6 7 8 9 10 score on financial literacy quiz 15 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

Attitudes: Wall Street and financial advisors & Financial Literacy N 5 160 140 4 120 level of trust 100 3 neutral level of trust 80 2 60 40 1 20 0 0 2 3 4 5 6 7 8 9 10 score on financial literacy quiz 16 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

Trust & Age N 5 400 trust across all person-types 350 4 300 250 3 200 150 2 100 50 1 0 18-25 26-35 36-45 46-55 56-65 66+ age 17 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

Financial Literacy & Age N 10 400 score on financial literacy quiz 350 9 300 8 250 7 200 150 6 100 5 50 4 0 18-25 26-35 36-45 age 46-55 56-65 66+ 18 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

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

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). 20 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

Financial Market Participation & Financial Literacy N 7 160 number of account types 140 6 120 5 100 4 80 3 60 2 40 1 20 0 0 3 or lower 4 5 6 7 8 9 10 score on financial literacy quiz 21 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

Preferred Degree of Autonomy in Decision Making and Financial Literacy N << delegation | autonomy >> 5 160 140 4 120 100 3 80 2 60 40 1 20 0 0 3 or lower 4 5 6 7 8 9 10 score on financial literacy quiz 22 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

Preference for Human vs. Algorithm-Based Advice & Financial Literacy N 5 160 << algorithm | human >> 140 4 120 100 3 80 2 60 40 1 20 0 0 3 or lower 4 5 6 7 8 9 10 score on financial literacy quiz 23 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

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 24 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

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

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 27 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

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 28 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

Thank You please contact us with any additional thoughts or questions Jill Fisch University of Pennsylvania Law School jfisch@law.upenn.edu Jason Seligman 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. 29 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

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

MTurk panels Fisch, Wilkinson- Ryan, Firth (2016)* FINRA* Fisch & Seligman Question Fin Lit Questions Lusardi & Mitchell -- "Big 3:" LM1: Compounding LM2: Inflation & Savings LM3: Safety of Stocks vs. Mutual Funds 92% 84% 90% 90% 84% 80% 98% 98% 96% Other Multiple Choice: MC: Mutual Funds can diversify MC: Compare the returns of two projects 60% 61% Other True False: TF: DC Plan Payments Fixed? TF: Relationship between risk and return in long run TF: Index funds vary based on manager experience TF: Possible to lose money in mutual fund TF: Diversification reduces variability 41% 80% 21% 86% 72% 48% 35% 89% 44% 73% 68% 100% 67% Average Total Score: 69% 65% 89% Average Across all Common Items: 74% 67% 86% Average for "Big 3" Scores 89% 83% 97% Sample Size 721 146 60 201 Table Notes: *: Results taken from Fisch, Wilkinson-Ryan, and Firth (2016) Table 3. FINRA column documents percentage of voluntary FINRA respondents getting question correct. 31 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

Poisson Number of ways to purchase market securities percent of sample CDF PDF 30 100 25 80 20 60 15 40 10 20 5 0 0 0 1 2 3 4 5 6 7 PDF demonstrates non-normal distrbution 32 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

Those with max number of account types differ Average Trust Across all Types of People Financial Literacy N N 5 200 10 200 SD+ 180 9 180 4 160 8 160 140 7 140 score on quiz level of trust SD+ 3 120 6 120 SD- 100 5 100 2 80 4 80 60 3 60 SD- 1 40 2 40 20 1 20 0 0 0 0 0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7 number of account types number of account types 33 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

Asset-type ownership by age group 100% age group: 18-25 26-35 36-45 46-55 56-65 66+ 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 34 April 4, 2019 Trust, Financial Literacy, and Financial Market Participation

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