The authors’ conclusions are clear: over all, financial education is laudable, but not particularly helpful. Those who receive it do not perform noticeably better when it comes to saving more, for example, or avoiding ruinous debt. Even more depressing, the results of efforts aimed at low-income people are particularly weak. Those who need the help most seem to benefit the least.
DON’T get me wrong. I am all for trying to teach household finance in schools, starting as early as possible. And when it comes to high school, I think learning about compound interest is at least as important as trigonometry or memorizing the names of all 50 state capitals. If we try enough approaches, and evaluate what works, we may improve such programs’ effectiveness. But we shouldn’t fool ourselves into thinking that adding a household finance class to a high school curriculum will in itself create knowledgeable consumers who can understand today’s wide array of financial products.
In some ways, the finding that financial education doesn’t provide long-term payoffs is hardly surprising. After all, how much do you remember from your high school chemistry class? Unless you use chemistry at work, you probably don’t recall much about ionic bonding. In the meta-analysis, even the most time-intensive programs — those with more than 24 hours of education and training, almost the length of a college course — had no discernible effects just two years later.
It would be premature to conclude that all efforts at improving financial literacy are futile. But it is a fair conclusion that simply doing more of the training commonly used now will not produce significant results. So what else might we try? Although no approach offers a panacea, three types of efforts seem worthy of more attention.
The first is what Professor Lynch, one of the authors of the meta-analysis, calls just-in-time education. Because learning decays quickly, it’s best to provide assistance just before a decision is made. High school seniors should receive help in how to think about a student loan, and how to make sure that the education bought with the loan offers good prospects for repayment. Just-in-time education can be offered at other crucial moments — when taking out a mortgage or figuring out when to retire. But unless such education is compulsory, many of the consumers most in need of help don’t take advantage of it. And we need to be sure not to confuse self-serving marketing with objective advice.
Another approach is to offer simple rules of thumb to help people cope. Because few people can calculate how much they need to save for a comfortable retirement, it might help to offer simple guidelines like “invest as much as possible in your 401(k) plan,” “save 15 percent of your income” or “get a 15-year mortgage if you are over 50.”
One example comes from a field experiment involving microentrepreneurs in the Dominican Republic. Of those who expressed an interest in receiving help, some were offered training in basic accounting principles while others were given simple rules of thumb. The accounting education did not have apparent effects, but simple rules — like keeping personal money and business money in separate drawers — led to better outcomes. This seemingly trivial concept helped small-business owners keep better track of how their businesses were faring.
The third approach, and the one I believe offers the best prospects of immediate help, is to make our financial system more user-friendly. You don’t need to be a computer scientist to use a smartphone. If we made choosing a suitable mortgage as easy as checking the weather in Timbuktu, fewer households would find themselves underwater when real estate markets tumble.
In the case of 401(k)’s, many companies have made their employees significantly better off by providing a well-designed default investment option, like a low-fee target-date fund. Most unsophisticated investors are better off using that option than trying to be their own portfolio managers.
The same principle can be used in other areas, from credit cards to checking accounts. The financial services industry — either on its own or as required by government regulators — needs to find ways to make it easier for people to make sound decisions. And those financial firms that engage in fraudulent practices should be prosecuted and stopped.
Analysis
This article does a wonderful job of pointing out that while financial literacy is an important subject and should most definitely be taught in high school, it’s not as helpful in the long run as one might think. And it’s totally right! People only retain information if it’s crucial for them to know. And in high school, so early in one’s life, all this new financial information is not only confusing, but also not immediately necessary to know. But there are ways to teach financial literacy that proves more helpful in the long run. At the end of the day, the lesson is this: Keep it simple! Whether it’s quick reminders on the spot before a major financial decision, or basic, rule-of-thumb training, or revamping the system to include default plans, banking can become much easier for all involved if we remember not to overcomplicate what should be a simple subject. Emphasis on should.
Source
Thaler, R. H. (2013, October 5). Financial Literacy, beyond the classroom. The New York Times. https://www.nytimes.com/2013/10/06/business/financial-literacy-beyond-the-classroom.html?searchResultPosition=8
