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Financial literacy: The impact of parental influence

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Table 1 shows the distribution of answers given to the parental influence questions. In addition to Table 1, none of the people achieved the highest score Box 1 Parental influence Jeugd1) When you were between 8 and 12 years of age, did you receive an allowance from your parents then? By allowance we mean a fixed amount received on a regular basis. (1*) Yes; (2*) Yes, but it was sometimes forgotten; (3) Occasionally; (4) No Jeugd2) When you were between 8 and 12 years of age, did you do little household chores (like washing the car) for which you received some money from your parents? (1*) Often; (2*) Sometimes; (3) Occasionally; (4) Hardly ever; (5) Never Jeugd3) When you were between 8 and 12 years of age, could you spend your money as you pleased? (1*) My parents decided on how I spent all my money; (2*) My parents decided on how I spent most of my money; (3*) Part of my expenditure was decided by me, the rest was decided by my parents; (4) Mostly, I could decide on how I spent my money; (5) I could decide on all my expenditures Jeugd4) Did you have a job on the side (like a newspaper round, a job on Saturday etc.) when you were between 12 and 16 years of age? (1*) Yes, I had many jobs on the side at that time; (2*) Yes, I had a few jobs on the side at that time; (3) Yes, I had one job on the side at that time; (4) No, I did not have a job on the side at that time Jeugd5) Did your (grand)parents try to teach you how to budget when you were between 12 and 16 years of age? (1*) Yes, they gave me advice and practical help; (2*) Yes, they gave me some advice and practical help; (3) Yes, but to a certain extent; (4) No Jeugd6) Did your (grand)parents stimulate you to save money between the age of 12 and 16? (1*) Yes, they emphasized the necessity of saving. (2*) Yes, they told me how important saving is (3) Yes, but to a certain extent (4) No, not at all

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while only 3 individuals achieved the lowest score possible. The average score is 2.88 and the median is 2.92. The first 3 questions are answered simultaneously positive only 28% of the time while the last 3 questions are answered simultaneously positively 22.9% of the time. These numbers seem quite low; however, this does not have to imply that we are using a wrong scoring method. The age for the first 3 questions is quite low, which makes it harder to remember how it was. Furthermore, our participants are mostly around 50 years old, which means that a significant amount of them was born close after the second World War. This might affect the attention that was given to the financial education of the children because more attention was given to rebuilding the country.

Question Answer # in %

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The questions from Box 2 are used to test the financial literacy. They are used to test numeracy and the understanding of; interest compounding, inflation, time value of money and money illusion. These questions are the basics to understanding financial planning, which is needed to make daily financial decisions. This will be described as basic financial literacy. Figure 1 displays the amount of right and wrong answers per question. In box 1 Box 2 Basic financial literacy L1) Numeracy. Suppose you had €100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow? (1*) More than €102; (2) Exactly €102; (3) Less than €102; (99) Do not know; (98) Refusal. L2) Interest compounding. Suppose you had €100 in a savings account and the interest rate is 20% per year and you never withdraw money or interest payments. After 5 years, how much would you have on this account in total? (1*) More than €200; (2) Exactly €200; (3) Less than €200; (99) Do not know; (98) Refusal. L3) Inflation. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? (1) More than today; (2) Exactly the same; (3*) Less than today; (99) Do not know; (98) Refusal. L4) Time value of money. Assume a friend inherits €10000 today and his brother inherits €10000 3 years from now. Who is richer because of the inheritance? (1*) My friend; (2) His sibling; (3) They are equally rich; (99) Do not know; (98) Refusal. L5) Money illusion. Suppose that in the year 2010, your income has doubled and prices of all goods have doubled too. In 2010, how much will you be able to buy with your income? (1) More than today; (2*) The same; (3) Less than today; (99) Do not know; (98) Refusal.

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Box 3 Advanced Literacy Questions D1) Which of the following statements describes the main function of the stock market? (1) The stock market helps to predict stock earnings; (2) The stock market results in an increase in the price of stocks; (3*) The stock market brings people who want to buy stocks together with those who want to sell stocks; (4) None of the above; (5) Do not know; (6) Refusal. D2) Which of the following statements is correct? If somebody buys the stock of firm B in the stock market: (1*) He owns a part of firm B; (2) He has lent money to firm B; 3) He is liable for firm B’s debts; (4) None of the above; (5) Do not know; (6) Refusal. D3) Which of the following statements is correct? (1) Once one invests in a mutual fund, one cannot withdraw the money in the first year; (2*) Mutual funds can invest in several assets, for example invest in both stocks and bonds; (3) Mutual funds pay a guaranteed rate of return which depends on their past performance; (4) None of the above; (5) Do not know; (6) Refusal. D4) Which of the following statements is correct? If somebody buys a bond of firm B: (1) He owns a part of firm B; (2*) He has lent money to firm B; (3) He is liable for firm B’s debts; (4) None of the above; (5) Do not know; (6) Refusal. P1) If the interest rate falls, what should happen to bond prices? (1*) Rise; (2) Fall; (3) Stay the same; (4) None of the above; (5) Do not know; (6) Refusal. (P2) Buying a company stock usually provides a safer return than a stock mutual fund. True or false? (1) True; (2*) False; (3) Do not know; (4) Refusal. P3) Stocks are normally riskier than bonds. True or false? (1*) True; (2) False; (3) Do not know; (4) Refusal. P4) Considering a long-time period (for example 10 or 20 years), which asset normally gives the highest return? (1) Savings accounts; (2) Bonds; (3*) Stocks; (4) Do not know; (5) Refusal. P5) Normally, which asset displays the highest fluctuations over time? (1) Savings accounts; (2) Bonds; (3*) Stocks; (4) Do not know; (5) Refusal. P6) When an investor spreads his money among different assets, does the risk of losing money: (1) Increase; (2*) Decrease; (3) Stay the same; (4) Do not know; (5) Refusal. P7) If you buy a 10-year bond, it means you cannot sell it after 5 years without incurring a major penalty. True or false? (1) True; (2*) False); (3) Do not know; (4) Refusal. P8) House prices in the Netherlands can never fall. True or false? (1) True; (2*) False; (3) Do not know; (4) Refusal.

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average and median and the factor loading for Jeugd4 is close to the average and is close to the median. The new coefficients of the parental influence dummies can be found in the table below. The sign of Jeugd1 has become negative now too. All those parental influence dummies are statistically and economically insignificant. After performing a factor analysis and creating a new dummy to cover for all the parental influence dummies except jeugd2 and jeugd4 a new dummy with coefficient -0.042, standard error 0.035 and p-value 0.235 was obtained. It would only increase basic financial literacy with less than 0.01% of the maximum. This dummy is statistically and economically insignificant. Question Factor loading Jeugd1 0.659786 Jeugd2 0.462694 Jeugd3 -0.517093 Jeugd4 0.338975 Jeugd5 0.473680 Jeugd6 0.320273 Total 1.74

Table 5 Factor loading for parental influence (Box 1)

Dependent variable Basic financial literacy Dummy jeugd1 -0.005(0.054) Dummy jeugd3 -0.076(0.053) Dummy jeugd5 -0.071(0.056) Dummy jeugd6 0.048(0.056) Table 6 Regression Basic Financial literacy only displaying parental influence. Standard errors in parentheses. *p<0.10, ** p<0.05, *** p<0.01 Table 6 shows a regression between the dependent variable, advanced financial literacy, and the explanatory variables. In comparison with basic financial

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Adjusted R-squared Basic financial literacy Advanced financial literacy Without parental influence 0.128 0.250 With parental influence 0.141 0.250 Table 9 Adjusted R-squared including financial education in school We also made an adjusted R-squared table without financial education to determine whether parental influence or financial education in school is responsible for the biggest part of the increase in adjusted R-squared. For basic literacy, the increase is bigger from no parental influence and no financial education to the scenario with parental influence and no financial education than the scenario with financial education and no parental influence. For the advanced financial literacy, the case is the other way around; financial education explains more of the total increase in advanced financial literacy. The absolute increase in fit is low, however for basic financial literacy the relative increase is 10%.

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