Is Teaching Financial Literacy a Waste of Time?

Not long ago, I wrote about the sad state of financial literacy in the U.S., and how some people, like Annamaria Lusardi of Dartmouth, are proposing widespread education to fix the problem.

But in a brief Money magazine Q&A, Lauren Willis, who teaches financial-products regulation at Loyola Law School, says that’s a waste of time. Excerpts:

Q: What’s so bad about financial education?

A: It doesn’t work. Sellers of financial products spend billions drowning out well-meaning messages to consumers from nonprofits or government agencies. Also, financial products are always changing — credit and insurance products have changed dramatically in the past 20 years — making it hard for educators to keep up. It’s not like sex education. As far as I know, people get pregnant the same way they did when I was in high school.

I couldn’t agree more with her first point. But I’m not sure about her second point: while financial literacy is perhaps more complicated than sexual literacy (or maybe not?), there are probably 10 basic concepts that fuel an understanding of nearly everything else to come.

Q: Then what should we do?

A: Stop trying to turn everyone into a financial planner. Instead, try to get everyone to understand that the people selling you financial products often don’t have your best interests at heart.

Well, okay: it’s true that turning everyone into a financial planner is absurd. And yes, her point about the financial-products sellers is, once again, well taken. But that doesn’t go quite far enough, does it?

Q: What type of regulation do you think would work?

A: Sellers could be required to offer you a default product that is safe. Whenever you applied for a mortgage, for example, you would have to be offered a 30-year fixed amortizing loan.

Well, that’s a fine nudge (a k a Nudge), as far as it goes. But it doesn’t go very far.

On the other hand, I share Willis’s belief that having the federal government teach financial literacy is not a great idea. That is the kind of thing the government tends to do very poorly.

As for teaching children about money, she says “that’s something families can do a much better job of teaching than government can.” Again, I agree. But we’re also looking at a vicious circle here: when parents are financially illiterate — which is the problem here — they’re not going to teach their kids very well, are they? Which means that the minority of people who are smart about money will (potentially) raise kids who are also smart, while the rest … well, you do the math.


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  1. jwesmc says:

    Attaining financial literacy seems a little like learning the Internal Revenue Code; unless you devote yourself to the serious study of it you will end up with just enough information to be dangerous.

    It would seem that some basic understanding of markets and how they work could be taught but understanding the myriad of financial products available appears virtually impossible. I suggest anyone interested begin by reading Freakonomics!

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  2. KevinM says:

    “Which means that the minority of people who are smart about money will (potentially) raise kids who are also smart, while the rest … well, you do the math. ”

    The minority will increase wealth, the majority will muddle through…

    then a presidential candidate will come along and pledge to even the score by taking wealth from the few aware, redistributing to the many unaware and starting the whole process over.

    Wonder what effect that would have on the behavior of the aware and unaware?

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  3. Charles says:

    I think if everyone was required to take a course in “logic” and read Buffett, and Taleb, and maybe Mandelbrot, they’d be ok. Add to that a section on compound interest, appreciating vs. depreciating assets, and there you go.

    The problem with teaching people “finance” is that even the experts don’t know what they don’t know. All you really need to know, in terms of finance, can be taught in one week in middle school. The critical thinking stuff should be more in-depth, and has applications beyond finance.

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  4. FFB says:

    You hit the problem at the end – There’s too many parents out there that don’t know enough about financial planning! We don’t leave it to parents to teach reading and math do we?

    And a lot of basics can still be taught in school. For example, spending more than you earn puts you in debt! They can be taught the power of compounding. How credit cards generally work and why paying the minimum isn’t a great idea.

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  5. Martin says:

    No one wants financial illiterate children (I hope), but if schools teach it, then they presumably do so at the expense of a another subject. So let’s look at what subjects are taught in pretty much every school (public or private), and compare it to financial literacy.

    Understanding compound interest will drastically improve someone’s financial well being, and improve someone’s quality of life more so than reading Hamlet, or knowing which clouds are which, or knowing the pH level of milk, or knowing how to multiple imaginary numbers, or who took over an Africa region 2000 years ago.

    Sure, knowing these things are great. But the point is millions of people live their lives in poverty (or retire in poverty) because they don’t understand the basics of savings. Not knowing any of the previously mentioned things will not drive anyone into poverty–financial illiteracy will.

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  6. fedupwithfinancialservicesindustry says:

    No one suggests that everyone should be an electrician to buy a toaster. Instead, we have safety regulations: if a toaster blows up 1 out of every 5 times, it won’t go on the market. (I thank Elizabeth Warren for that analogy.) But somehow consumers are supposed to become finance wizards to buy a mortgage (more than 1 in 5 subprime mortgages are either in or on their way to foreclosure) Oh please. It’s one thing to provide people with basic financial literacy skills and make sure they have a way to manage their money. It’s another thing to expect them to comparison shop when they’re dealing with stunningly complex financial products. It is much easier, more direct, and achievable to regulate what kinds of financial products can be marketed to people who are not bankers or economists and shouldn’t be expected to act like they are.

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  7. Scott W says:

    Sounds like Willis views the financial world through her own lens of experience-financial products. Reminds me of a pediatrician we once had who tried to cure our son’s ear infections with medication. After 4 or 5 rounds of increasingly strong antibiotics, we eventually went to an ENT who solved our son’s ongoing 3 year problem in about 15 minutes of surgery. Turned out that our son has small Eustachian tubes, and no amount of medication could fix that, but our pediatrician couldn’t seem to grasp that.

    The financial product world is complex, but as Dubner mentioned, there are good basic principles which probably won’t make you wealthy, but they will prevent poverty when followed (and these can serve as a baseline for anyone): 1) avoid consumer debt (this kind of interest is not your friend), 2) use a budget (live within your means), 3) save for rainy days, 4) only invest money you can afford to lose.

    I have a friend who is fond of saying that it’s not how little you earn, but how much you spend that gets you into trouble. While I recognize that there are people who truly are impoverished, we’ve even seen stories here on the Freakonomics blog that indicate that people who make just a few dozen dollars a week can save and eventually lift themselves out of poverty. And I’d wager that *most* people who get into financial trouble in the US got there by making bad decisions, and people who get out of poverty do so by learning and following a few sound financial management principles, not by any government welfare program.

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  8. Chris says:

    A few thoughts…
    1) You cannot pound water into a rock.
    2) Someone could try to teach me to be an artist. I could learn something, but I would never become skilled because I lack the talent. Worse, maybe, I have no interest in the becoming artistic. It seems entirely possible that there are people with similar “financial” limitations and interests.
    3) Our daughter received some financial tutoring at at a big ten university. They were able to present things to her in a way which caused her to “hear” things we could never get her to hear when we talked about them. Did these learnings change her behaviors and financial management? On the margin, perhaps, but not in a comprehensive manner.
    4) Government can do many things, but it cannot do everything.
    5) It is enormously difficult to ignore the “herd”, particularly in money and consumption matters. The Dot Com bubble was created not average people. Rather, the market moved because of where professional money managers place their bets. Ditto for all most bubbles. [There were two transactions in the housing bubble: Foolish buyers of homes, and numbskull lenders.]

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