• money

Entrepreneurs and the financial literacy timebomb

The world faces a problem – not enough of us are financially literate. This is an issue because the world is more financially complex than ever before and more and more of us are setting up businesses or operating as sole traders in the ‘gig economy’. Entrepreneurship is trendy – but understanding a balance sheet isn’t.

This isn’t an entirely new problem. At the end of the last century a concern started to spread among public authorities and a handful of academics in the US. Faced with the spectacular growth of financial products of increasing complexity, they started to investigate whether the average American household was able to grasp very basic financial concepts, such as compound interest rate, inflation and financial risk diversification. The results were alarming, showing that financial illiteracy was widespread among Americans.

Many studies have followed these first surveys, and they paint a picture, right up to today, of widespread financial illiteracy among households. But entrepreneurs haven’t been studied. Entrepreneurs, it goes without saying, need to manage their finances soundly if they want to guarantee survival. Given the alarming situation among households, it is natural to turn our attention towards entrepreneurs, whose financial decisions are certainly more complex, and decisive for economic growth.

So – to this end we organized the first workshop on Financial Literacy and Entrepreneurship with the aim of summarizing what we know on the topic and proposing future research ideas. The workshop, organized in partnership with GFLEC, the Global Financial Literacy Excellence Center at George Washington University School of Business, and its director, Annamaria Lusardi, gathered academics, regulators, educators and financiers to think of the best way to investigate the link between basic financial knowledge and entrepreneurship.

So….what did we find out?

First of all, it is clear that we still need to identify the basic financial concepts that every entrepreneur needs to grasp. These concepts are different from the ones needed by households, for which there is now a large consensus. An entrepreneur should know some basic principles in money matters, in budgeting, in financial management and in planning: but which ones are the most important?

Of course, you could say ‘that’s what accountants are for!’ and it’s true – we should take into account that business owners have the possibility to get professional assistance. But we still need to identify the concepts and decisions key to success that an entrepreneur needs to master independently of professional advice.

The results of a survey organized by the Dutch Chamber of Commerce were presented at the workshop by Martijn Lentz, Advisor of the support service to entrepreneurs at this institution. What it showed was that entrepreneurs are able to self-assess their degree of financial knowledge. Unfortunately, we have very little information about what entrepreneurs actually know, and what concepts they need to brush up on more – this is certainly a key area for further investigation.

Secondly, entrepreneurs are a self-selected sample of the population, certainly not random. How important is financial education to spur entrepreneurship and more importantly “good entrepreneurship” that has the ability to create economically viable ventures? Some early studies by Annamaria Lusardi and George Panos show that a high degree of basic financial literacy increases the probability of being entrepreneur, but the evidence is still too coarse to draw any conclusions on the previous two questions.

Third is the question of how we organize financial education programs for entrepreneurs. Caroline Jenner, CEO of Junior Achievement Europe, and Billy J. Hensley, Senior Director at NEFE shared their view on this and agreed that the first step is to identify the skills and competences that the business and finance communities perceive as essentials. But it also became clear that the training of teachers is essential, keeping in mind that in order to spark entrepreneurial spirit the programs should be designed for those at the younger end of the educational spectrum – the younger people learn these skills, the better.

Finally, we need to consider the changes in the labor market. Digitalization, fintech, crowdfunding and other technological ruptures are pushing us towards an economic model in which people are the new firms. Entrepreneurs are turning into the “canary in the coal mine” telling us about the overall health of our economies.

Derek Ozkal, Program Officer Entrepreneurship at the Ewing Marion Kauffman Foundation, said that entrepreneurship is very trendy, but the figures are actually worrying. A poor financial education may be one of the factors behind the decline in business dynamism. We need to understand the barriers created by the extremely competitive environment we are living in, and to prepare people-firms to survive in this environment matching their skills with market requirements. An adequate financial education is necessary to help people reaching their economic independence, and in the ultimate analysis, growth at the aggregate level.

If we don’t, our collective financial illiteracy is a ticking time bomb…

Riccardo Calcagno, emlyon business school

Financial economist as training, I have been a professor of finance at emlyon business school since 2011. I hold a PhD from the Catholic University of Louvain (Belgium). My research focuses on information economics and its applications to household finance and corporate finance. I have worked on various topics such as financial literacy and financial advice, mergers and acquisitions and the problems inherent to the negotiation processes behind them, the design of managerial compensation. I previously worked at the University of Tilburg and at the Free University of Amsterdam (VU). I have published articles in various academic reviews, such as the Review of Economic Studies, the Journal of Corporate FinanceCorporate Governance: An International Review and the Journal of Banking and Finance, among others.


More information on Riccardo Calcagno:

• His CV online
• His ResearchGate page

By the same author:

Aug 24th, 2017|

Leave A Comment