Keeping it Simple: Financial Literacy and Rules of Thumb

This paper reports on two randomized trials that test the impact of financial training on firm level and individual outcomes for microentrepreneurs in the Dominican Republic. The study developed two distinct types of financial accounting training in order to analyze the most effective ways of teaching financial accounting skills to small business owners.

The study focused on the trade-off between a standard approach to small business training, which teaches the fundamentals of financial accounting, and training based on simple rules of thumb. The former aims to provide a relatively complete understanding of financial decision making, while the latter provides a simplified view of financial decision making. Findings indicate that:

• Simplified, rule-of-thumb training produced significant and economically meaningful improvements in business practices;
• Standard model produced no significant effects;
• Clients were more likely to implement rule-of-thumb training;
• Rule-of-thumb training had more impact on business outcomes and on saving.

Study results indicate that the rule-of-thumb training is more effective because it is easier to understand and that follow-up visits can ensure that clients understand the training.