May 26, 2011
Two Steps Back for Financial Education
Consider these grim outcomes for financial educators:
- One study found that the seniors who had the least financial knowledge were most confident about their knowledge;
- The most successful educational tools – stock market games – send the message it’s okay to gamble;
- When Illinois required consumers to attend a workshop for certain types of mortgages, homebuyers avoided those mortgages;
- Scores for national financial literacy tests administered to high schools by the JumpStart program declined between 1997 and 2008;
- Soldiers exhibited worse budgeting behaviors after taking a financial course than before.
In the past decade, foundations, governments, and non-profits have poured millions into financial literacy efforts in grade schools through college and among low-income neighborhoods and specialized groups, such as homebuyers and the military.
“We and people have learned very little,” said Lauren Willis, a professor in the Loyola Law School in Los Angeles, who highlighted the dismal research outcomes for financial literacy during a conference this week at Boston University’s School of Management.
There are several reasons for the poor results, said Lewis Mandell, a senior fellow at the Aspen Institute Initiative on Financial Security, who sat on a panel with Willis. Personal financial information is not “sticky.” People easily forget it, particularly if it is not used and made relevant to someone’s current situation.
Age doesn’t seem to matter, either: the results of teaching college students are no better than results in high school. “It just doesn’t seem to do any good,” he said.
Willis and Mandell weren’t entirely pessimistic. They said some novel research and educational efforts under way now still hold promise that the financial literacy of the American public can be improved.
One program by the World Bank plans to produce soap operas and telenovelas popular in Latin America to connect people on an emotional – rather than a cognitive – level to financial information, Mandell said.
Psychologists also are gaining new insights into the root causes of financial literacy, such as a lack of self-control in pre-school.
Willis said also there is evidence that individuals who have facility with math are more literate, and math skills can be improved through, for example, pre-natal nutrition.
Consumers also benefit from financial advisors who do more hands-on work with their clients, or employers who introduce defaults into financial programs designed by behavioral economists.
“Perhaps financial literacy programs aren’t what we should be using,” Willis said. “Perhaps financial literacy is the politically palatable path, but it might not be the most efficient.”
Materials and papers provided by conference speakers are available here.