A U.S. Army requirement that newly enlisted men and women complete an ambitious personal finance course is having some impressive results.
At a time when financial education is increasingly being criticized as an ineffective way to raise Americans’ low saving rate, an 8-hour course held on 13 Army bases is significantly boosting how much military personnel are saving for their retirement – among both big and small savers. They also trimmed their debts.
The strong results, described in a new study by William Skimmyhorn, an assistant professor at the U.S. Military Academy at West Point, are also sending a ripple through the financial literacy community.
“The reason this study is so interesting is because it’s so unusual,” said Harvard University’s Brigitte Madrian, co-director of the household finance working group for the National Bureau of Economic Research. “There aren’t a lot of other scientific studies one can point to” that show empirically that financial education can improve an individual’s well-being, she said. …Learn More
In a September paper distributed by the National Bureau of Economic Research, Professor Brigitte Madrian and her co-authors reviewedthe current state of U.S. financial education. In an interview, Madrian, a professor in Harvard University’s John F. Kennedy School of Government, provided some fresh insights into education, regulation, and the role of the financial industry.
Q: Besides low financial literacy, why do people make bad financial decisions?
A: Procrastination. Inattention – one reason people accrue credit card late fees is that they forget to pay their bills on time. Advertising – people are swayed by the marketing of financial services and products. Not all products pushed by financial advisers or financial-services companies are appropriate for everyone, and sometimes people are swayed into purchasing products that may be right for someone else but aren’t right for them.
Q: Does financial education even work?
A: I believe the jury is out. We do not have a lot of compelling evidence on the impact of financial literacy programs. There have been lots of studies on programs, but many of them are of dubious scientific validity. Of the ones that are more credible in terms of methodology, some find very little impact on financial education and a handful find financially positive effects. …
Financial-product complexity isn’t talked about on Capitol Hill, where Congress is arming itself for battle royale over the appointment of Harvard Law School professor Elizabeth Warren to head the new Consumer Financial Protection Bureau.
But some economics and business professors are sticking up for the financial consumer, who they say faces an “ever-widening set of financial options” and “dizzying amount of information.”
“Households are expected to make decisions about pension plan contributions and payouts, to choose from a wide array of credit instruments to fund everything from home purchase to short-term cash needs, and more generally to assume a greater level of responsibility for their financial well-being,” Harvard economists Brigitte Madrian and John Campbell, Harvard Law professor Howell Jackson, and Peter Tufano at the Harvard Business School wrote in a recent paper.
“There is growing evidence that consumers make avoidable financial mistakes” with “nontrivial financial consequences,” they said.
Published in the latest issue of the Journal of Economic Perspectives, the paper used three case studies to support their call for more creative regulation: mortgages, payday loans, and 401(k)s. …Learn More