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Childhood experiences shape financial behavior in adulthood

Press Release of July 29, 2015

Parents exert indirect influence on the way in which their children will deal with money and financial products in the future – schools can promote competent financial behaviors

"Waste not, want not“: Children whose parents teach them this concept—and offer similarly wise directives when it comes to money and finances—will often make better financial decisions as adults. This is evidenced by a new study conducted by the German Institute for Economic Research (DIW Berlin). Many people do not know how to invest their assets in the best possible way or how to obtain a favorable loan. "Financial literacy—for example, in the form of special financial training—can indeed help improve the financial behavior of adults. But there are other influencing factors that haven’t been explored as much,“ says Lukas Menkhoff, financial expert at DIW Berlin. Together with DIW economist Antonia Grohmann, Menkhoff investigated how family background and other childhood experiences influence financial literacy. “The results of our study show that parents teaching their children about financial matters critically influences financial literacy—and with that, financial behavior. School also plays an important role,“ explain the study’s authors. Thus the likelihood of someone spreading his or her wealth across multiple types of investments is 13 percent higher if that person studied economics in school. In fact, individuals with a qualitatively better education even have, on average, a 23 percent more broadly diversified financial portfolio.

German Institute for Economic Research (DIW Berlin)

The German Institute for Economic Research (DIW Berlin) is one of the leading economic research institutions in Germany. Its core mandates are applied economic research and economic policy advice as well as provision of research infrastructure. As an independent non-profit institution, DIW Berlin is committed to serving the common good. The institute was founded in 1925 as Institut für Konjunkturforschung (Institute for economic cycle research). Since 1982, the Research Infrastructure SOEP (German Socio-Economic Panel Study), a long-term study, is affiliated to DIW Berlin. The institute has been headquartered in Berlin since its founding. As a member of the Leibniz Society, DIW Berlin is predominantly publicly funded.

How parents raise their children directly affects financial literacy

By using a so-called mediation analysis, the DIW researchers are not only able to determine which factors affect financial literacy and behavior—and to what extent—but also whether the influence is direct or indirect. It turns out that how parents educate their children about finances, and childhood experiences involving money, are directly connected to financial literacy. The schools’ economics courses and the quality of the school in general, however, have only an indirect effect on financial literacy, in that they improve numeracy. "A good understanding of numbers and an affinity for math of course promotes financial literacy and, through this, good financial behavior later in life," explains Antonia Grohmann of these results. "But parents teaching their children is at least just as important." Interestingly enough, the educational background of the parents does not affect the future financial behavior of their children, according to the DIW study.

Parents should understand the importance of teaching children about money

Many OECD countries, as well as some emerging and developing countries, have already launched individual initiatives to improve the financial literacy of their populations. The quality of this financial training, however, differs greatly, and empirical studies on the impact of such training have shown mixed results. It is therefore important to strengthen numeracy in general—preferably, beginning in the classroom. “In addition, parents need to be much more aware of the importance of educating their children in the area of finance. Regularly encouraging children to save and teaching them how to budget can have a strong effect,” says Menkhoff. He warns, however, that "improving financial behavior in a lasting way is a difficult and lengthy process. It will likely be difficult to use political measures to influence parenting behavior, in particular."