Adolescents’ and Young Adults' Naïve Understandings of the Economic Crisis

Since the beginning of the twenty-first century there has been an upsurge of interest in the fields of Financial Literacy (FL), recently defined by the Organization for Economics Co-operation and Development (OECD, 2016, p. 85) as the “knowledge and understanding of financial concepts and risks, and the skills, motivation and confidence to apply such knowledge and understanding in order to make effective decisions across a range of financial contexts, to improve the financial well-being of individuals and society, and to enable participation in economic life” and Financial Education (FE), intended as interventions aimed at fostering FL.

A further burgeoning took place after the financial and economic crisis began in 2007-2008. The number of studies on FL have increased (see Atkinson & Messy, 2012; Lusardi & Mitchell, 2014; OECD, 2014), as have the interventions of FE promoted by international and national public organizations (e.g. Australian Securities and Investments Commission, 2003; OECD, 2005; U.S. Department of the Treasury, Office of Financial Education, 2006; World Bank, see Carpena, Cole, Shapiro, & Zia, 2015). There are also financial firms (e.g., VISA, 2015) and private organisations and networks that have been dedicated to economic education for several decades (e.g., Junior Achievement, https://www.juniorachievement.org) or which have been established in the last few years with the mission of enhancing the financial capabilities of children and youth (e.g., Children & Youth Finance, http://www.childfinanceinternational.org).

Schools are becoming increasingly involved in FE: at least twenty-one countries have implemented FE programmes in schools (Russia Trust Fund, 2013), and in some states (e.g., UK, USA, see Pang, 2010) various aspects have been incorporated as a statutory part of the National Curriculum. However, the education and learning sciences community seems to be scarcely aware of, or interested in, this issue. With few exceptions (e.g., Davies, 2015; Marchetti, Castelli, Massaro, & Valle, 2016; Pang, 2010), all papers on this topic have been published in economics, business, or financial journals.

Concern for the level of FL and initiatives aimed at its improvement have been stimulated by the conviction that a “lack of financial literacy was one of the factors contributing to ill-informed financial decisions and that these decisions could, in turn, have tremendous negative spill-over” (OECD, 2013) and that higher levels of financial literacy will improve economic growth and help to reduce poverty in all economies (OECD, 2005, p. 35). The lack of FL has recently been testified by the results of the PISA 2012 survey of 15-year-olds from 13 participating OECD countries, which showed that “only one in ten students, on average [...] can analyze complex financial products and solve non-routine financial problems. They show an understanding of the wider financial landscape, such as the implication of income-tax brackets and can explain the financial advantages of different types of investments” (OECD, 2014, p. 34).

In addition of the definition of FL proposed by OECD (2016) presented above, there are other numerous and various implicit and explicit definitions. An examination of how financial knowledge is operationalized in questionnaires measuring FL shows that it falls into four categories: budgeting, saving, borrowing and investing, which comprise an understanding of money, interest, and risk (Remund, 2010).

Several scholars have criticized FE, and the underlying concept of FL, highlighting its limitations or challenging its premises. According to some authors (see, for instance, Bernanke 2006; Lusardi & Mitchell, 2014) many FE interventions have been successful in terms of both increased financial understanding and its effects on financial outcomes. However, according to a recent meta-analysis of the relationship between FE or FL, and financial behaviours, “financial education as studied to date has serious limitations that have been masked by the apparently larger effects in correlational studies.” (Fernandes, Lynch, & Netemeyer, 2014). Lauren Willis (2008) has examined the knowledge and skills necessary for making sensible financial decisions, concluding that they are too complex to be provided by a FE program. Those programs are therefore likely to have the adverse consequence of increasing consumers' self-confidence and over-optimism about financial risks. According to Willis (see also Williams, 2007) FE appears to be an alternative to regulatory interventions on financial markets. Rather than empowering consumers, as its proponents claim, this policy makes them responsible for the consequences of their financial choices, leaving financial firms free to sell risky or even toxic financial products.

Other authors stress that FE is based on too narrow a view of what FL means - a view focused only on the knowledge and skills needed for consumers of financial products, disregarding those necessary for citizens to participate in the financial and economic policies of their country, as the electorate or as persons more deeply committed to political activities. The strongest criticisms are delivered by those who “view FE as responding to the interests of the states and firms in expanding consumer markets for financial products, and as facilitating a shift from the state to the individual of responsibility for personal economic security.” (Williams, 2007, p. 227; in the same vein see Arthur, 2012).

Focusing on citizens instead of consumers widens the scope of the definitions FL and FE. These definitions should include an understanding of the behaviour of financial systems and the role of banks or governments in their operations (e.g.: Davies, 2015), leading to FE being seen as part of an integrative concept of economic education (Arthur, 2012; Mittelstaedt, Lutz, & Wiepcke 2013; Remmele & Seeber, 2012). For instance, Mittelstaedt et al. (2013) propose that the history of financial crises, the social and political consequences, and the different measures taken by governments to face them, should be included in the secondary school social science curriculum, integrated with other disciplines (such as civic education, mathematics, history).

Planning and delivering effective teaching of these topics requires a wide knowledge base about learners' conceptions, as is the case in other school subjects (see Vosniadou, 2013, for reviews of students' conceptions of traditional school subjects and how they affect learning), but there is a dearth of research in students' conceptions of economics and, more generally, society (see Berti, 2005; Lundholm & Davies, 2013; Webley, 2005, for reviews). Surveys of FL are numerous and broad (see World Bank, 2013 for a review), but they have examined a limited range of topics, mainly regarding financial services and products, rather than the workings of the financial system or its components. A few studies on children's understanding of banking were conducted before the deregulation of banks in the last decade of 20th century, which brought about radical changes in the structure and operation of banks (see Stiglitz, 2010 for USA; Gual, 1999 for European countries). These studies have shown that several adolescents do not understand how a profit can be realized through the difference between loan and deposit interest (see Berti & Monaci, 1998; Webley, 2005 for reviews). This suggests that the more complex operations permitted by deregulation are far beyond what ordinary people can envisage.

The only studies that, although indirectly, have investigated ordinary people’s conceptions of the operations of the financial system are those that have examined lay perceptions or explanations of the 2007-2008 crisis. They are rather heterogeneous studies, conducted independently of each other and involving adults in diverse countries such as France, the USA, Russia, Germany, Israel, and sub-Saharan Africa (Leiser, Bourgeois-Girone, & Benita, 2010), Ireland (O’Connor, 2012), and France (Roland-Lévi, Pappalardo Boumelki, & Guillet, 2010). Only Aprea (2015; Aprea & Sappa, 2014) examined secondary school students (from Germany). A broad on-line research, promoted by the Association of European Economic Education (AEEE), addressed to 17-19 year old European students (from Italy, Austria, Germany, Ireland, France and UK) is still continuing (http://www.economicseducation.eu/research/student-survey-on-the-economic-crises), although some results collected in 2012 have been summarized by Weber (2013).

Although an account of the crisis is beyond the scope of the present paper, before examining the results of the above studies, we will provide a brief outline of the economists’ explanations. These explanations refer to a complex sequence of actions, involving different actors, such as political authorities, financial enterprises, banks, firms, and ordinary people. The events and processes resulting in the 2007-2008 financial crisis were legislative acts (such as the laws deregulating financial institutions); the creation of new financial products (e.g., mortgage securitizations and their bundling in Collateralized Debt Obligations; Credit Default Swaps); increased interest rates; the inability of homeowners to meet mortgage payments; the repossession and selling off of houses by lenders, resulting in slashed prices and foreclosures; the collapse of banks holding “toxic” products, or state intervention to save them; the fall of stock markets around the world. The impoverishment of people who lost their houses, and the reduced credit available to businesses and families, caused the crisis to spread to other economic sectors, through a vicious cycle of reduced consumption and the collapse of production and employment (see Baily, Litan, & Johnson 2008; Stiglitz, 2010; Weber, 2013).

With the exception of Aprea's studies, conducted using semi-structured interviews, investigations into lay perceptions or explanations of the 2007-2008 crisis asked participants to mark on a Likert-scale their degree of agreement with statements describing possible causes of the crisis - such as, for instance, capitalism, the stupidity of decision-makers (Leiser et al., 2010); self-serving motives of politicians, the greed of individual bankers, self-interested actions by the general population (O’Connor, 2012); the globalization of production and import, actions by the national government (AEEE, ongoing) - or their attitudes about the crisis (Roland-Lévi, Pappalardo Boumelki, & Guillet, 2010). Factor analyses highlighted different and heterogeneous factors. Some factors referred to individual characteristics of economic actors, including the immorality of economic players and stupidity of decision makers (Leiser et al., 2010) and materialistic culture, extravagant life styles of ordinary people (O’Connor, 2012). Others factors referred to impersonal, structural processes, such as economic trends beyond anyone's control, dependence on the economies of other countries (O’Connor, 2012), capitalism, globalization, and the complexity of the economy (Leiser et al., 2010). Although these data give a glimpse into how people perceive the crisis, they do not reveal what explanations came spontaneously to their minds, nor whether and how they interweave different causes in complex explanations.

Aprea (2015), who tapped spontaneous explanations, scored the answers in terms of their elaborateness, that is whether or not a certain component of the crisis (i.e., onset, causes, progression, impact), was mentioned, and in what detail. Elaborateness turned out to be generally low. Although most participants mentioned subprime crises as the origin of the financial crisis, “only about 35% mentioned spill-over effects to the banks, and only six students could explain the interbank transfer mechanism. Potentially detrimental features of innovative financial products, such as the securitization of accounts, were only stated in three cases, and more systemic reasons such as deregulation, over-leveraging, incorrect pricing of risk, or inherent instabilities of financial capitalism were not mentioned at all.” (Aprea, 2015, p. 18).

These results suggest that open-ended questions can give a different glimpse of lay people's explanations of the crisis by highlighting which factors they represent and how, and which factors are missing or misinterpreted. On these grounds, we aimed to enrich the picture of students' spontaneous explanations of the crisis starting in 2007-2008 with a study conducted using open-ended questions, involving a large group of participants, and comparing students from different countries (Italian vs Swiss), with and without economic education. For this reason, we asked students to write their answers to broad open-ended questions. In order to draw a detailed picture of students' views, we first identified and described the types of causes mentioned, then we examined whether and how they were connected. This study was exploratory and did not test specific hypotheses. However, given the results of the reviewed studies above, the complexity of the financial system and the sequence of events resulting in the crisis, we expected to find very superficial answers from the participants without economic education. That is, we expected answers to mention the events closest to everyday experience (for instance, increased unemployment, the inefficiency of the political system), without linking them to more remote events (such as laws deregulating financial institutions), and the operations of the international financial system.

Method

Results

We begin with the results of the first level coding of answers of the Italian sample (which comprises secondary school and university students); we then present the results of the Swiss sample and compare them with those of the Italian secondary school students. Lastly, we describe the second level of coding (identification of links between the causes mentioned) in the whole sample.

Discussion

Most participants in the present study stated that they were affected by the crisis and described its impact. Italian secondary students were affected more than university students, and Swiss students more than Italian probably due to differences in economic status. The Swiss GDP per capita is among the highest in the world (see Central Intelligence Agency, 2017). The crisis students were asked to explain was therefore familiar and significant. Both Italian and Swiss students mentioned the more visible effects of the crisis, such as the fall in employment and wages, but they reported different causes with different frequencies, possibly mirroring the different ways in which their countries were affected by the crisis and the issues which were more prominent in the media and public debate. Political causes were mentioned more often by Italian students, and banks, euro and international factors by Swiss students. This difference mirrors the different impact of the crisis in the two countries, and the perceived high relevance of inefficiency and corruption in Italy’s political system (Transparency International, 2015). It might also be affected by the different wording of the questions for the two samples. The crisis was presented to Italian students as affecting their own country, and to Swiss students it was presented as affecting “various European nations, and in part also Switzerland”. However, similar findings emerged in the data collected in 2012 in the on-going research conducted by Association of Economics Education in Europe - AEEE: “Italians (mostly students in economic courses) blamed the action of their own government, but also tax evasion and the growing gap between the rich and poor” (Weber, 2013, p. 6).

Other causes, mentioned by both Italian and Swiss students (but more often by Italian students) were the European Union or Euro, Immigration, Globalization, and the inadequate behaviour of consumers and businessmen. Nobody mentioned laws deregulating the financial sector, which laid the ground for the speculation at the origins of the crisis, and very few mentioned the American subprime crisis. Thus, on the whole, students showed a very poor knowledge of the international factors and the sequence of events which led to the financial crisis and its spread to other economic sectors and the whole world.

Another relevant findings in the present study were those regarding the complexity of the explanations. The average number of causes mentioned was about 2, certainly too few to account for a sequence of events that involved actors and actions (such as those outlined in the Introduction) that the majority of participants (sometimes all of them) did not appear to know.

What most participants mentioned among the causes (closing businesses, unemployment, reduced purchase power) were, instead, the effects of this sequence, that they may have experienced personally or through the media (in Italy, people were struck by the numerous suicides of entrepreneurs facing bankruptcy, see Sironi, 2013). Upstream events, involving operations of the financial system, the laws that allowed them, and their effects on the real economy, seem to be generally unknown by most participants, as shown by Aprea (2015). This does not come as a surprise. How financial systems operate cannot be perceived directly, but can only be known through information provided by books, the media and expert explanations. The news of national and international economic events as delivered daily by television and newspapers can only be understood if related to an economic framework, that only explicit teaching can provide.

These results point to some topics that FE should address, similar to those suggested by Davies (2015), for example, how the political system affects the financial system and more generally the economy, through regulation and deregulation of financial and economic activities, and more direct actions; the transformation taking place in banks, financial operations, and the numerous forms of market malpractice that can take place.

The present paper adds to the limited literature on people's understanding of financial crises by showing spontaneous explanations that complement those tapped through forced choice questionnaires. On the whole, these explanations appear very poor, with little or no knowledge of the operation of financial institutions and their links with the real economy.

This study, despite offering some interesting and quite new evidences about adolescents' and young adults' naïve understandings of the economic crisis, presents some methodological issues that need to be carefully evaluated for the interpretation of the results. First of all, the participants were not representative of their respective populations. Furthermore, the task of giving written answers might have fostered short shallow explanations. In particular, the request to describe the causes of the crisis might have suggested writing a simple list, rather than clarifying the connections between the causes identified. Future research should explore this aspect by using in-depth interviews able to grasp the argumentative structure of the responses, and then have a deeper qualitative analysis of the collected narratives. Also, the use of differently worded written questions could help to discover whether, and how, students can connect different causes and explain how they operate. For instance, “How did the crash of one country’s stock exchange spread to other countries?” “How does a financial crisis spread to the real economy?” A more detailed picture of students understanding of the financial systems is a necessary step for planning a FE aimed a promoting and understanding not only financial products, but also the financial sector and government finances.