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.


steve

Quote from "Intelligent Investor" -Benjamin Graham
"I have never seen dependable calculations
that went beyond simple arithmetic or the most
elementary algebra. Whenever calculus is
brought in or higher algebra you could take it
as a warning that the operator was trying to
substitute theory for experience and usually also
to give to speculation the deceptive guise of
investment"
Tell that to the PhDs who modeled option ARMs,
and subprime loans.

Nalam Ravindranath

We are always wise after the incident. We encourage children to borrow left and right. But we do not direct those borrowings into growth oriented investments. We and our kids should realize banks do not lend out of love, but out of greed. We keep on biting we could not chew. Instead of going for small apartment house, we go for big ranch houses. While borrowing, we feel like we are Bill Gates with great future incomes, while servicing a debt we realize that we have no bills but only gates to hell. It is not Beware of Banks, it is Beware of Borrowing for making poor investments. We need to read Charles Dickens( to understand money management) but not investment manuals.

FSchubert

I'm surprised no one has mentioned Robert Kiyasoki's books or Cash Flow games. I bought his game for children and have played it with my then 9 and now 10 year old son. The children's game doesn't teach Wall Street finance, but I've noticed how much more careful he is with his own money and he doesn't use his money to buy toys or other things that give only fleeting gratification; and we've played the game only a few times.

Khalil

I totally agree that financial education would be a waste of time if it was taught by someone who has not taken the time to learn proper financial concepts. I disagree, however, with Ms Willis, and agree with the author concerning having parents teach money to their children. That is an absolutely horrible idea and there are so many reasons why. I am a licensed, trained, and experienced financial educator. I have sat kneecap to kneecap with families in two major cities, Atlanta and New York City. I have spoken to attorneys, physicians, business owners and executives at corporations. There is one thing that all of them had in common, when it comes to financial education they all were clueless. If these individuals are clueless about their money how on earth do you believe that they can teach their children about money. The only solution to the matter of financial education is to have individuals like myself come into schools and educate children, teachers and parents about proper finaicial concepts. That is the only way that it would make sense. Anything other than that would equal disaster not only for the child but for the financial future of our nation

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Joe Smith

I think a financial literacy course should be mandatory for anyone seeking State or Federal public office. To run for President you would have to pass. That would be a major step forward from what we have now.

rdonrichardson

It's all so simple.We have all been lead to believe that the politicans will do what is in our best interest.Wrong!Think and reflect on you,your family,friends,neighbors,community,state,country and the most important your personal relationship with Jesus Christ and God the Almighty.This nation was founded on Judeo-Christian principles.These truths have never changed,only we have.We as men and women have tried again and again to circumvent our spritiual relationship with the One True God with fear,greed,selfishness.Look to his Word-the only financial planner you need is the Bible.

Stephen

I am for schools teaching financial literacy personally.

In the early 90s, Geography wasn't part of the regular school lesson plans in schools. The United States scored DRASTICALLY below other countries (at an alarming rate). I went to a private school of good standing, and recall scoring the highest in the school on the standardized test for this while I was in the 4th grade (I swear it was a good school too).

There were several things that were changed. While Geography wasn't put into the system as a full fledges subject (as there were time constraints), it was given a bigger cut of Social Studies, and things such as "Where in the World is Carmen Sandiego?" was a program on PBS.

I know its a different era now, and putting a show on PBS doesn't have the same effect it used to with cable, but its interesting that both this article and one on how television isn't evil were out the same day. People do enjoy learning things, even about financial markets. "Mad Money" is a popular show even watched by people who don't understand all he's talking about (again on a personal level, my stepfather who works in a factory and failed out of highschool years ago).

Perhaps more financial education directed programs would help this issue? Not something like "Elmo diversifies his portfolio", but if the Daily Show and Colbert Report can help get real world issues out to a previously uncaptured audience, there's a chance a financial show would work as well.

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GeneZ

My wife and I homeschool our 5 children. We have found that you do not have to be an expert in a subject to be able to teach it. But you do have to take the time and effort to learn the basic concepts and be able to find a curriculum that communicates those and beyond effectively. I use a couple of college textbooks for english and take a few years to cover it. We use widely used textbooks for math and science that are modern and up to date.

For economics we discuss our financial issues with our children, teaching thru example. We were not always smart with credit and now have debt we have to pay on, which makes things tighter now. We did get an adjustable when we first moved into our new home. But we made sure it could be converted and watched interest rates and when it was time to convert to a fixed so we wouldn't pay more in interest we did.

We also have economics as a course in school. Using Economics in One Lesson by Hazlett (that someone mentioned) and a basic economics workbook that goes thru many areas such as compound interest, what is a stock, what is a mutual fund, etc and so on. It hits all of the basic concepts without getting into more complex issues. We are finding it fairly easy to teach economics.. Not sure why it is so hard for the schools...

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Stephen

As an economics PhD and professor, I know very little about "finance," though I suspect I know more than most non-financiers. I know enough to stick with index funds and to stay away from financial companies that do a lot of advertising. I find my knowledge of statistics to be vastly more useful for understanding my investments--not because I've ever calculated the beta of my investments, but because statistics inculcates a view of the world as a basically stochastic place where things go up and down, and where there are long-term trends. If you can think about the world that way, you're at least halfway to being able to think about finance; if you can't think about the world that way, I could teach you a hundred formulas and give you a bunch of powerpoint tips, but I don't think it would do you much good.

My students want me to tell them how the world works in five easy bullet points. There are some very practical things I can teach (all the freshmen in my health economics class learned how to read a health insurance plan), but for the most part, I don't think it's even about "critical thinking" but about worldviews.

Calculus formulas come and go, but you need to be able to dance at the margins of a process, to see the world in terms of lots of small things moving around. You may forget your C syntax, but programming teaches you to break problems down into extremely small, regularized pieces, and to spend a lot of your planning time thinking about how to minimize your exposure to mistakes and to be able to change things easily later on (and to document the crap out of everything you do so you can remember it in two years, a lesson I never quite manage to learn).

(Whenever I hear someone say that they've never used algebra, I assume that they either (a) learned it so well that they don't realize they're using it on a daily basis, even if they're not writing the equations down, or (b) can barely make change in a grocery store.)

Which is to say: Shakespeare and history teach us stories and patterns about human nature, and almost as importantly give us a common language for discussing those patterns with other people. It's useful stuff. I can't believe number 25 is complaining about having had to read all of 4 Shakespeares. You have at least 6 more to go before you're ready to think about financial planning. I would suggest trying King Lear and The Merchant of Venice to get some good stories about poor financial management. Once you have some intuitions to tap into, then you might have a chance of understanding the formulas or "practical" advice. But the practical advice is worthless without that foundation of worldview, of intuition, of story.

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toxic

You don't have to be Alan Greenspan to figure out that ARM mortgages might just be a bad idea if you can barely make the teaser rate...

This isn't some arcane thing that blew up in peoples faces. It was exactly the sort of thing a bit of financial literacy might have stopped for some people.

Stacia

To the commentators who are grousing about having to read Shakespeare in school: You miss the point of literature classes. They are not taught to acheive the endpoint of memorizing line, but to teach critical thinking -- the ability to analyze text (and in the case of plays, speech); to discern and understand less-than-obvious motiviations; to look at situations form multiple angles; and so forth. All of which are as important to financial literacy (and seeing through a salesman with a bad product) as understanding compounding interest. (Not that I am against that subject.)

Kendra

The thing with money is we all have to be disciplined. Just like we have to be disciplined to work out and eat right to be healthy. Or we have to show up to work on time to keep our jobs. We have to set limits and be good examples for our children to raise responsible adults. And yes there are some that would take to financial literacy well and study and get good grades, ect, ect while others would not. But, it would mean that they might have a hard time getting cars and homes if they had made the wrong choices.

As far as credit goes almost anyone can or could qualify which made my jobless 15 year old brother start to see dollar signs, but no means to pay it back. There should be more regulations on who can get credit.

If there is a way to teach people how to be more disciplined with there money than I am all for it. For example instead of teaching 2nd graders Math with apples maybe we should modify it and use Paychecks-House payments, ect. But if this is just another way to be able to blame someone else for each of our own individual problems than forget it.

Sorry about this, but I am having a hard time with people refusing to pay their mortgage bills when both adults have good paying jobs. Assuming they might be able to rent something better while still being able to hang onto their over-sized toy hauler, boat, fancy cars and 4-wheelers. Don't they have any pride or sense of responsibility or do they just assume other tax paying Americans will take care of there bad debt?

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slacker kate

amen to teaching bread-and-butter basic financial literacy. I have gone thru grad school and did not get any financial education until a real-estate course in architecure school. also, learning how money works can be excellent motivation for some students to learn algebra.

One of my co-workers got really good financial basics from the home economics course required at her HS in Florida - which was apparently actual home economics, not cooking and sewing.

Adam

@ #31 - there's no reason that every student needs to learn how to calculate time value of money. Most students know algebra and could learn it anyway, but for those who don't, they can still understand the concept that money in your pocket today is worth more than money in your pocket tomorrow.

@ #33 - You do not need 10k to start investing. There are plenty of sensible things that you could do with 1k or just about any other number. I most certainly did not have 10k as a college student when I opened my first account. If memory serves, I had 1.5k and split it between two stocks that I had researched. $7 per trade means 1% in fees - could be worse. The money I made in absolute dollars is chump change, but I learned a lot along the way, and allowed the habit of fiscal planning to become part of my permanent makeup.

Jimmy

I am a math teacher, and I feel that the greatest fallacy in education is the failure to teach students financial literacy. I know it does not fit into the "traditional" curriculum, so the schools need to add it as a new curriculum.
The true problem is that parents do not know enough about financial literacy to teach it to there kids (as stated earlier).

Rob

One point that I think has been overlooked. Lauren Willis is a law professor who has the opinion that teaching financial literacy is a waste of time (based on some pretty questionable premises). Annamaria Lusardi is a well-respected economist who has done extensive behavioral research on the effectiveness of financial education. No disrespect to the lawyer, but I'm siding with the economist on this one.

Nathan W.

Susanna, investing doesn't take nearly that much money, although I know of mutual fund accounts that require a certain level of investment to waive annual fees, usually about $3000-5000. Index funds are one of the best ways to go, as they are simpler, safer, and have fewer to no fees. Some can be started with as little as $400. Or, you could buy bonds or CDs, which accommodate very small amounts invested, although they don't have huge returns.

Also, there is a wonderful personal finance blog called the Simple Dollar (among others) which is designed to help people like you understand basic financial things like budgeting, frugal living, mortgages, investing, credit cards, and so forth.
http://www.thesimpledollar.com/

The information is out there if you can find it.

Susanna K.

I'd love it if some basic financial literacy were taught in school. I have a college degree and got an A in both 2nd semester calculus and intro economics, but my understanding of "finance" doesn't get more complicated than the definition of a mutual fund.

I've tried to learn some on my own, but it's all so confusing. I don't invest because I don't believe I have enough money to do so (you need about 10K that you don't really care about losing just to get started), and because I am not confident enough in my understanding of finance.

How am I supposed to teach my son about finance when I don't even understand it myself?

htb

You know, my late father made nearly every financial mistake in the book, literally from "charge unaffordable fancy dinners to your credit card, because you deserve them" to "cash bad checks at the grocery store, because you want $50 today and don't care that it will cost you an additional $50 in bank and bounced check charges next week" -- up through and literally including "send your rent check to the nice man in Nigeria that wants to make you a millionaire."

I and my siblings, however, seem to have done well. We have all figured out that "rainy day" funds don't magically appear out of nowhere. We avoid consumer debt like a disease. It is possible to learn quite a lot about financial practices by carefully watching a very bad example.

Bill Monks

There can't only be winners, there have to be winners and losers. Educating people about finance is fine but some people are going to understand it better than others, then comes the social engineering and those with a better grasp of the fundamentals will leech money from those willing to listen. Just like the old system.