91ɫ��Ƭ

Dr Juliet Bourke  0:03 

If I asked you to clearly explain what's driving our economy: inflation, GDP, interest rate cycles, or how monopolies impact the market, how confident would you be in your answer? Recent research shows that nearly half of all Australians fail basic economic literacy tests.

Professor Isabella Dobrescu  0:23 

8.5 million adult Australians are financially illiterate. That's about 45% of our adult population. This means that millions of people are actually not having the bare minimum knowledge to make confidently decisions about how much they save, how much they borrow. Financial literacy is not a me problem, but it's a society problem.

Dr Juliet Bourke  0:49 

The economy is complex, but it always has been. Understanding how our economy affects the way you view and manage your finances is crucial. The tools you use to build your life and your business have fundamentally changed. We've swapped physical wallets for apps, cash is outdated, and you can now pay a bill automatically. It's frictionless, invisible, and easier than ever to ignore. In an economy that's constantly evolving, is your financial knowledge evolving with it? I'm Dr Juliet Bourke, Adjunct Professor at the School of Management and Governance, and this is The Business Of, a podcast by the 91ɫ��Ƭ Business School. Professor Isabella Dobrescu is Head of Economics at 91ɫ��Ƭ Business School. She says it's never too late to get a handle on your finances. Isabella, could you explain the difference between economic literacy and financial literacy?

Professor Isabella Dobrescu  2:03 

So, I think when people hear financial literacy, they usually think about investing and about stock market. But the basic level, it's way more fundamental than that. It's about understanding how to budget and how to save and how much to borrow and what's your appetite for risk, how to make financial decisions with your money way broader than than just the stock market. On the other hand, economic literacy it's even broader than that. So economics, at its core, it's about understanding incentives and trade-offs and how the markets are moving and how the prices get created. Where is that demand and supply intersecting? And why certain economic policies make sense more for some people and for others, and when to tax an activity and subsidise another. So overall, is how decision- making at the level of individual businesses and then the government all interact together. That's why we're we're thinking of these two things in tandem. Because without the economic literacy, you do not understand the decision-making. And why is important to understand the decision-making is because we live in a world of constraints. We have limited everything, limited money, limited time, limited information, limited attention. If you understand, if you are economically literate, you understand how to make decisions in this constrained world, aka the real world.

Dr Juliet Bourke  3:30 

Do you have a specific example where someone doesn't seem to understand the difference between finances and economics?

Professor Isabella Dobrescu  3:37 

Yes, unfortunately, I do, and it's very close to home, so this is a highly educated person on a local council who was having at the same time a significant amount of savings in their bank account, their low-interest-rate normal bank account, about 4%. So if you leave the money there, that money is going to earn you about 4% interest, and at the same time, they were spending a lot on their credit card, so they were carrying a lot of debt on their credit card. And when you have debt, you also need to pay an interest. And on the credit card at that time, I think it was roughly 20%. So just by moving the savings and paying from the low-interest-rate account, the credit card debt, they would have saved that difference in interest rate. They would have stopped the 20% interest rate. This is why it's important to have economic literacy. It starts with financial literacy, and in the end, what you want to have is you know an individual at the individual level, at the community level, at the society level, people that understand what are the incentives that are moving behaviours, how are these behaviours moving, and in the end, what's the opportunity cost of every choice that they are making?

Dr Juliet Bourke  4:55 

And how do you think Australians are going with that in general? Do you think we are both economically and financially literate, or better at one than the other, or both bad?

Professor Isabella Dobrescu  5:05 

We're both bad. Now, unfortunately, way fewer than we would like in a country like Australia are economically or financially and financially literate. So, the general statistic that that gets sent out there in the media is like oh, and it's absolutely true. So, Australia is among the top 10 countries in the world with the highest level of economic and financial literacy, and that's a great headline, right? But that masks a bit of a domestic crisis. So if I would tell you that 8.5 million adult Australians are financially illiterate. That's about 45% of our adult population. You would not be that excited as the top 10. And now let me pile on that by saying that there is a substantial gap between women and men. So about 63% of men are financially are considered to have an adequate level of financial literacy, 48% of women. Now we take a step back, and again I'm piling up on that. If we look at just teenagers, we have about 28% of teenage boys, having some form of financial literacy, 15% of teenage girls, right? So it's you know I'm an economist, don't get me wrong. I like my statistics, but this means that millions of people are actually not having the bare minimum knowledge to make confidently decisions about how much they save, how they save, how much they borrow, how do they manage risk, how they manage their own credit, what does it mean for them that interest rates go up and and down? What is this doing on the market that they choose to be active on? How do they understand wage growth? How do they understand standard-of-living and the cost-of-living? Right. To that, you would say, well, shouldn't education take care of it? And to that, I say, sure, economics education does take care of it. But for that, you would have to get a Bachelor of Economics, and then you have all these wonderful tools to understand how you make decisions in the world around you, but not everybody wants to do or can do a Bachelor of Economics. Is there another point where we can catch everybody? And sure, there is high school. Now, the problem in high school is that the economics education pipeline in high school is weak and getting weaker. So in the early '90s, boys and girls were studying economics roughly at the same rate. Now, male students, boys are outpacing, outnumbering girls at the rate of two to one. Now, that's dangerous because usually economics education, particularly in high school, is creating a pathway into economic decision- making, and then you go into business and finance and public policy and leadership. If that pipeline is getting narrower and less representative, then the discipline and ultimately the people who are making public policy decisions for all of us is getting less representative.

Dr Juliet Bourke  8:28 

So, do you think it's about this issue of less education and and early education, high school education? Or is it also about the fact that maybe the world is more complex in terms of economics? I mean, is it? That's an assumption I'm making. Yeah, maybe it's not more complex.

Professor Isabella Dobrescu  8:46 

It's both, and the bigger of the two, it's education, and that's a good news, because we can't stop progress, but we can actually ramp up our our education. So that's good because one, we do have a gap. Two, we can close the gap. Three, education, which is something that we can immediately do something about, seems to be the biggest avenue that we are having at our disposal to move the needle.

Dr Juliet Bourke  9:17 

How do I know if I am financially or economically literate?

Professor Isabella Dobrescu  9:22 

Financial literacy is not a destination. It's about finding things both about yourself, your preferences, what drives your behaviour, your internal incentives, and about the world around you, and all the time adjusting your behaviour to to those external or internal factors. Because, I mean, think about it, not even yourself stayed the same from one day to the other. Let alone the world around you, right? Changing all the time, t he economy is changing, the type of financial products that are out there are changing. The regulation is changing. Technology is changing. And you yourself, your cognitive ability is changing all the time. So it's playing the long game. For instance, take superannuation and you know the black box of superannuation, do you know what plan type you're in? Do you know how much you're contributing? Do you know whether your plan comes with insurance or not? Do you have multiple accounts? Because this is a pitfall that a lot of people are falling into. Have you consolidated, right? So this is just one example of, look how many questions I've asked just about one single thing. And then of course you can go into into bigger things. Do you know what inflation does to you? Do you know how, for instance, you know, RBA announcing the interest rates go up and go down. It's not just going to impact the housing market. How is that trickling down? Because whatever happens in the market, in the housing market, is going to impact the second largest asset in your portfolio after your house, which is your super, right? And how is that going to impact the money you put aside for your kids to send them to to school, or how you are prepared in the end in terms of age care, your will, your estate planning, and so it's it's all interconnected. And this is why you know you you have to look at it's all interconnected for you, financial literacy, and it's all then interconnected for all the people that are around you, whether they're you know it's the family, is the community, and in the end, it's it's society.

Dr Juliet Bourke  11:31 

And it seems that we're transitioning into a very different type of financial environment. If you think about it, going from cash, for example, to now digital wallets, and we've got investing apps. How have those things changed our understanding of money?

Professor Isabella Dobrescu  11:48 

The biggest behavioural change, probably in the more than 20 years, has been this removing the pain of paying. Right, you have your wallet, and back in the cash times, you see your coins and your your notes flying off your wallet, and eventually your wallet would be empty and those transactions were visceral, were real. Now we spend our time and our life tapping, right? You tap with your card, you tap with your phone, you tap on the subscribe button. You click on subscribe buttons, right? We have the buy now, pay later, and those transactions are not real because that money you do not, you do not feel that transaction. And don't get me wrong, having these other alternative tools, it's very convenient, but it changes your spending habits, and behavioural economists have long said frictions matter. So putting even a small hurdle in front of the spending impulse of a person is going to just make them pause for a nanosecond. But that nanosecond is enough for them to evaluate whether they really want that good and service or or not. Sure, convenience is great, but not when it works against you. So I think our problem is that the payment technology has not really kept pace with our spending habits.

Dr Juliet Bourke  13:14 

I'm curious about that because my daughter always pushes back on me, and she says that cash doesn't feel real to her. Cash feels like paper and nothing, whereas she thinks when she sees the electronic transaction, that's real. I'm wondering, so if this is a generational thing...

Professor Isabella Dobrescu  13:33 

What I'm saying is that the warning signals with cash, when we had cash, were there and you could catch them earlier compared to digital because with digital you know there's always the next thing to do so unless I don't know you put it in a calendar that one hour a month at least you sit down and you take stock of your expenses it's harder to do because it's you having to force yourself rather than looking at your wallet and say, "Okay, oops, now it's empty, that's, I 've hit my budget constraint, right?" Like that's it. And of course, the more we rely on digital economy, the stronger the financial literacy needs to be.

Dr Juliet Bourke  14:17 

You've used a lot of economic terms in this discussion, and I just wonder if you could break those down for people.

Dr Juliet Bourke  14:30 

It's not true.

Professor Isabella Dobrescu  14:32 

Nope.

Dr Juliet Bourke  14:32 

You know what? I remember this time I was speaking to someone, and he had a very large business, and I asked him what his profit margin was, and he said to me, "What's a profit margin?"  And I was so surprised he couldn't tell me whether his business was profitable.

Professor Isabella Dobrescu  16:11 

Yep.

Dr Juliet Bourke  16:11 

Is that common?

Professor Isabella Dobrescu  16:13 

It is, it is common. You know, it's again not a matter of intelligence, not a matter of business acumen.

Dr Juliet Bourke  16:21 

Isn't it a matter of business acumen? Isn't that fundamental to understanding your business if it's profitable or not?

Professor Isabella Dobrescu  16:27 

I think acumen understood as instinct, right? There, there is a a bit of this glow when someone is coming out of nowhere, right, and is taking the market by surprise, and they have very little knowledge, but a lot of instinct, and usually those people are those who are reading a lot. So they might not have all the degrees to prove it, but they are people who are self-taught. But yes, unfortunately, it's it's common and it is dangerous because you know if I don't understand my budget, and I go bust, t here will always be someone to catch me,  right? And this is the the problem with a person being in financial distress, right? They are stressed, t hey have lower well- being. They are less resilient to shocks at work. They can have trouble concentrating, t hat's productivity loss. Now the cost is transferred to the business, was now losing productivity, and finally, eventually, the cost is being transferred to the government. Both because the economy is losing productivity overall, but also because they need to step in with support services. So, to some extent, someone is going to catch the individual. But the problem is much bigger when you're dealing with the business because the leader needs to understand the market, how prices are fluctuating, then everything that has to do with regulation, why the government is taxing some activities, subsidising others. Also, they need to understand their workers and what motivates them, how to support their productivity, and the customers.

Dr Juliet Bourke  18:14 

I think you've been experimenting with some new ways to teach complex economic concepts. Can you tell me about Step Up and Playconomics that you've been doing at 91ɫ��Ƭ?

Professor Isabella Dobrescu  18:26 

So, Step Up is the 91ɫ��Ƭ's financial literacy outreach program for high school kids, and the engine of the entire program is Playconomics, which is a video game that is allowing students to experience economics rather than being talked at economics things, facts, concepts. What drives the success is that people and students can actually experiment with things. They see the consequence and they go back and they redo those decisions, and they see how the effects are changing. And this way, they can actually see in real time what the mechanism behind and how you know you change one thing here, and then an entire suite of of things are are changing, not just one, the most obvious one. So in the game, they make decision about budgeting and spending, how much to save, how much debt to take on, and they learn about their own appetite about you know on on risk and and delayed gratification and and all that. They can see all that in real- time, and all of a sudden, it becomes a lived experience. It's like living their life on fast forward, and there's no consequences. So you can make as many mistakes and you can do as many retakes as you want.

Dr Juliet Bourke  19:44 

I want to do that.

Professor Isabella Dobrescu  19:45 

We're going to sign you up.

Dr Juliet Bourke  19:48 

I'm thinking about our listeners and and thinking maybe some of them are in their 30s. What advice would you give them to make sure their finances are in order?

Professor Isabella Dobrescu  19:57 

Okay, so what I'm seeing at least, you know, from my point of view, is that the 30s are where you build your foundations, and they need to be solid. The 40s is your balancing act. You're balancing multiple responsibilities, right? And the 50s is where you prepare to sail in the sunset, and it's you you know, you're trying to make it the most glorious sunset that that you have, and really enjoy and be productive in your retirement. So in the 30s, things that you might look at is: Am I building an emergency buffer? Do I have too much debt on my credit card, high- interest debt? Am I contributing, or have I started contributing seriously to to super? In general, I think it's the 30s is about building good habits, good economic and financial habits, and then try to avoid expensive mistakes, and you're gonna be fine. As I said, the 40s are about the balancing act. Children are coming in, caring responsibilities are coming in, right? So it's more about: Am I managing at my best, my mortgage? Am I saving enough for retirement? I should have already started, but is this enough to get me there? Career risk: What happens? Do I have enough buffer in case something goes wrong with my with my job, right?  AI, for instance. And then the 50s is when you prepare for retirement. So, am I having enough money? Obviously, but also, how would I draw down? How do I take out that money? And of course, the age care, the healthcare, the insurance-is-is this, you know, enough? And how do if if it's not? How do I make those last-minute decisions in order to allow me to retire comfortably and spend the next 30-40, years in a comfortable state?

Dr Juliet Bourke  21:49 

You mentioned before this idea that economic literacy, even financial literacy, is like going to the gym.

Professor Isabella Dobrescu  21:55 

Yep.

Dr Juliet Bourke  21:56 

And you've got to build it up and then keep it up.

Professor Isabella Dobrescu  21:58 

Yep.

Dr Juliet Bourke  21:59 

So, if I'm wanting to make sure that I'm staying up to date in the financial world and I'm not operating on outdated assumptions, how do I actually do that? How do I put the gym analogy into practice?

Professor Isabella Dobrescu  22:12 

Remember that when you go to gym, you have to put in the effort, and sometimes it hurts. So you know the easy way out are all these influencer right? There's been an explosion of financial content, and it's everywhere: TikTok, Instagram, podcasts, newsletters. But some of it is really excellent, and it can make financial decisions accessible and practical and and engaging. Remember that what we want is not perfection; is engagement, right? Some of it is not, and the the problem is that social media is really rewarding entertainment, and it's you know it's it's it's rewarding the wow factor over accuracy. So the way to look at all these influencers is they are complementing your learning, but not substituting the evidence. So something sparks your interest, you know that that might apply to you, go and dig deeper, and go to gym. And gym is not necessarily all the time pleasant, right? So dig into the RBA materials, the treasury materials, Money Smart , or just go and talk to a financial advisor. So don't mistake entertainment and easy for evidence. The two are really not the same, and definitely do not make financial decisions minor or major based on how charismatic an influence or how confident someone looks online.

Dr Juliet Bourke  23:46 

It seems like a lot of people are using AI for their financial advice rather than going to a financial advisor who might be expensive. Do you have a view on that?

Professor Isabella Dobrescu  23:55 

Well, the jury's still out because these days the AI is becoming so good. I think you cannot get away for the most accurate information. You cannot get away from actually reading the official materials, right? And those are not necessarily a page turner, but it's where you're going to get absolutely the most correct information. But given how fast AI is advancing and how you know comprehensive, how many points of view they're taking into account when they are giving you whatever advice they're printing on the screen, right? It's not immediately clear to me that that's bad.

Dr Juliet Bourke  24:39 

If you had a magic wand and you wanted Australians to adopt one financial habit or principle, so that we would be more financially or economically literate. What would it be?

Professor Isabella Dobrescu  24:51 

I think I would go to the root and I would wave the magic wand and get everyone t o get interested in it. T here is no way around it, you have to be able to learn it, and the best time to learn it, is when you want to learn it, not when you need to learn it. Because when you need to learn it, it might actually be that it's a little bit too late. The good news is that there are tools out there to make the switch. The world is not going to get more simple, unfortunately. So it's up to us to just take control. And nobody said it's going to be easy. So this is not a matter of of easy. But I think the the faster we I can when you know wave my wand, and get people to realise that financial literacy is not a me problem, but it's a society problem. And becoming financially illiterate is not an add-on, but the core skill. Even though it can get a little bit hardcore, the better we are all going to be.

Scientia Professor Richard Holden  26:20 

Thinking more about what the kind of innovation ecosystem in digital payments looks like is really important. So there is essentially no blockage to somebody inventing or creating an app in Australia, and you know the banks could do it with their payments apps and give people a better version of the kind of old school technology of cash in envelopes and talking to their banks about how the customer experience can be improved is really important.

Dr Juliet Bourke  26:50 

You'll find the link in the episode description. The Business Of is brought to you by the University of New South Wales Business School, produced with Deadset Studios.