Keeping it Simple: Financial Literacy and Rules of Thumb

Individuals and business owners engage in an increasingly complex array of financial decisions that are critical for their success and well-being. Yet a growing literature documents that in both developed and developing countries, a large fraction of the population is unprepared to make these decisions. Evidence on potential remedies is limited and mixed. Two randomized trials test the impact of financial training on firm-level and individual outcomes for microentrepreneurs in the Dominican Republic. We find no significant effect from a standard, fundamentals-based accounting training. However, a simplified, rule-of-thumb training produced significant and economically meaningful improvements in business practices and outcomes.

Drexler, Fischer, and Schoar (2012) Urban (Santo Domingo).RCT.Comparison between: 1) Standard, fundamentals-based accounting training & 2) a simplified, rule-of-thumb training that teaches basic heuristics to manage finances.Only rule-of-thumb training produced significant improvements in business practices and outcomes (by 6-12% relative to control). Increase in sales in bad weeks. Impact pronounced for micro-entrepreneurs with poor financial literacy upfront. Impacts suggest reducing complexity of training program.http://personal.lse.ac.uk/fischerg/Assets/KIS-DFS-May2012.pdf1,193 business or personal loan clients (90% women).