The dark side of financial literacy
More than 50% of Americans are financially anxious says a 2018 FINRA study, and the numbers are worse for younger generations, women, those with financially dependent children, and the non-retired. This is with good reason. Only 36% of pre-retirement Americans think their retirement savings are on track. And only two in five had any kind of a budget. An equal amount carry high-interest consumer credit card debt month to month. (And few think to look for a lower rate card even though they are often available.)
Is better financial literacy the answer? Many states think so and are adding it to high school curricula. As of 2021, 21 states require financial literacy programs, up from 13 years ago. Great, right? We are heading in the right direction.
Any social science researcher knows what’s coming next. Giving people information doesn’t change behavior. And the same is true in financial education. A study published in the journal of Management Science in 2013 looked at 168 papers covering more than 200 studies. It found that financial literacy education was responsible for .1 percent of change in behaviors. (Yes, point-one percent.)
Worse, much of the financial literacy out there is being developed by the finance industry itself. Schwab (whom I use as a custodian) has Moneywise America, and Robinhood, the stock trading phone app, has Robinhood Learn. Perhaps they mean well, but it’s not hard to imagine the bias of an industry that makes money when consumers make mistakes.
Fortunately there are some good programs out there like the CFPB resources for educators, and a YouTube series from PBS aimed at a youthful audience. The two most popular episodes are entitled ‘How cars keep you poor!’ and ‘How eating out keeps you poor!’
What’s the solution? I’d love to change the whole economic system into one that naturally has less financial risk and distress. I’m still working on that, and I’ll be sure to post a new blog when I figure it out.
More immediately, the education must be there when we need it. That Journal of Management study above found that information only had a meaningful impact on behavior for a few months. (It still wasn’t great, but at least it meaningfully helped.) Adults making decisions in real time need the information, not kids in high school. And it needs to be independent of biases from the finance and banking industry.
That’s a tall order. And it’s much harder to do than forcing a 17-year-old to sit through tedious lesson plan. But it would actually help.
