What Do Hand-Washing and Financial Illiteracy Have in Common? A New Freakonomics Radio Podcast

Our latest podcast is called “What Do Hand-Washing and Financial Illiteracy Have in Common?” (You can download/subscribe at iTunes, get the RSS feed, listen live via the media player above, or read the transcript below.) It explores the idea that most problems are solved by more education — except when they’re not.

You’ll hear Michael Langberg, chief medical officer at Cedars Sinai Medical Center in Los Angeles, talk about why doctors there (and elsewhere) routinely fail to wash their hands despite the evidence suggesting they must:

LANGBERG: There’s something in the human condition that somehow disconnects what is really good evidence from personal choice and habit. And I don’t know why that is. I’m not a psychiatrist; my field is internal medicine. I just have the observation. Physicians are no different.

You’ll also hear National Book Award winner Sherwin Nuland, another doctor, talk about Ignatz Semmelweis‘s discovery of the importance of hand hygiene.

We then turn to the topic of financial literacy, which we’ve written about before. You’ll hear from Alan Krueger, chairman of the White House’s Council of Economic Advisers; and from Krueger’s predecessor, Austan Goolsbee, who talks about the role that Americans’ financial illiteracy played in the Great Recession.

You’ll then hear from two guests who offer up radically different solutions to our financial illiteracy. One is Annamaria Lusardi, an economist at George Washington University, who has spent the past 10 years studying the topic, and believes that education is the way out:

 LUSARDI: In the same way we start people, you know, in school just reading and writing, you know, from the very beginning. We don’t teach literature so that people go on and write “War and Peace,” but we teach it so that people can appreciate a good book.

Next is Lauren Willis, a legal scholar who previously worked at the Justice Department and the Federal Trade Commission. She has argued against widespread financial education, recommending instead a new cadre of financial advisers and greater transparency and regulation in the financial industry:

WILLIS: It’s sort of like saying, well we should start teaching everybody to be their own doctor, teaching everyone to be their own mechanic, you know, something like that, terribly inefficient to do that. Not only is it inefficient, but it has this sort of culture of blaming the consumer. You know, you’re the one who didn’t figure this all out.

 

Audio Transcript

Stephen J. DUBNER:  In the mid-nineteenth century, Vienna General Hospital was considered a world-class research center. But the hospital’s maternity ward didn’t have such a good reputation.

 

Sherwin NULAND: Because it became known throughout the city of Vienna that if you went onto the doctor’s division or the doctor’s clinic, you were much more likely to die.

 

DUBNER:  That’s Sherwin Nuland. He’s a professor of medicine at Yale; he wrote a book called The Doctors’ Plague about the situation at Vienna General Hospital. In the early 1840’s , one in ten women whose baby was delivered by a doctor there died from what was called childbed fever …

 

NULAND: Childbed fever is an infection primarily of the uterus, and it spreads out through the tubes into the abdominal cavity, of women immediately after they have given birth.

 

DUBNER:  In 1847, one in six women died. And that was the year a young Hungarian-born doctor named Ignatz Semmelweis joined the staff. He was horrified by the situation. And he went digging in the numbers for a clue. Now, here was something strange: There were two separate maternity wards in the hospital – one staffed by doctors, who were all male, the other by midwives, who were female. The death rate in the midwives’ ward was far lower. So was it a guy thing that was causing all this death? One theory at the time held that birthing mothers were such fragile creatures that being seen naked by a male doctor was enough to kill them! Now, Semmelweis didn’t buy it. He also discovered that women who delivered their own babies, on the street, had an even lower rate of childbed fever:

 

NULAND: In those days, it would occasionally happen that a woman--out of wedlock--would deliver herself, sometimes in the streets! The Germans had a word for it, gassengeburten, they were street births. And he was hard put to find anybody who died when a woman self-delivered.

 

DUBNER:  And so Semmelweis came to suspect the likely cause of these thousands of deaths: his fellow doctors. But how? The answer came in the form of a tragedy. A colleague of Semmelweis’s, a doctor he admired, died after getting gangrene. He had pricked his finger with a knife while giving a lesson in autopsy.  

 

NULAND: And Semmelweis was away on a brief vacation when this happened. But when he came back he began to study scrupulously the autopsy findings of his friend, and noted that they were just like the autopsy findings of women with childbed fever who were dying.

 

DUBNER:  His conclusion? Doctors were carrying what he called “invisible cadaver particles” into the maternity ward. Better known today as bacteria. But remember, this is the mid-1800’s, pre-germ theory.

 

NULAND: Consider a typical morning of a student or a young doctor in training. The very first thing he would do in the morning was to go to “the dead house,” as it was often called, and to do an autopsy on one of the women who had died the day before. And when the abdomen is open, there is a sea of pus – around the uterus, around the tubes, the young doctor will put his hands in this. He then probably wipes his hands on a towel, and goes up to take on his regular duties as an obstetrician-in-training. Sometimes one hand will be on the patient’s abdomen, another will be in the vagina, and he’ll be feeling that uterus with the two hands. And you can see all of the opportunity for infecting the inside of a woman’s body with the cadaver particles – invisible cadaver particles made obvious only by their smell.

 

DUBNER:  Semmelweis figured if he could get rid of the smell, he could get rid of the dangerous particles. So he ordered every medical attendant who entered the doctors’ ward to submerge his hands in a chlorine wash before seeing patients. Within six months, the death rate of women in the doctors’ ward had plummeted.

 

NULAND: And that was it. It was as simple as that.

 

DUBNER:  It was a stellar piece of medical detective work. Semmelweis not only found the cause of death, but he figured out how to prevent it. So you know the rest of the story – it became standard procedure for doctors to disinfect their hands and they stopped passing germs along to patients …. right? Well, not exactly. Consider the results of a 1996 study from a pediatric hospital in Australia. Doctors self-reported their hand-hygiene rate at 73 percent. Not great but still, considering how busy doctors are, it could have been worse. One problem, though. During the same time that those docs reported their rate at 73 percent, the nurses were spying on them, to see what their actual hand-washing rate was. And it turns out it was a pathetic nine percent. Similar studies show that doctors are consistently worse at washing their hands than any other medical staff. So, what’s going on here?

 

Michael LANGBERG: Doctors are human.  

 

DUBNER:  Michael Langberg is the chief medical officer at Cedars-Sinai Medical Center in Los Angeles.

 

LANGBERG: So there’s something in the human condition that somehow disconnects what is really good evidence from personal choice and habit. And I don’t know why that is. I’m not a psychiatrist; my field is internal medicine. I just have the observation. Physicians are no different. What’s disturbing about physicians is since they’re human -- you would expect them to have the same rate as everybody else if not even greater rates, if not a hundred percent, than other healthcare providers. And at Cedars Sinai, I regret to report that they’re the lowest rate.

[THEME MUSIC]

 

ANNOUNCER: From WNYC and APM, American Public Media: This is Freakonomics Radio. Today: what do hand-washing and financial illiteracy have in common? Here’s your host, Stephen Dubner.

 

DUBNER:  So even at an excellent hospital like Cedars-Sinai in Los Angeles, it’s the doctors who have the lowest rate of hand hygiene. Now, isn’t that bizarre? With most problems in society, we subscribe to the belief that education is the answer. Especially when you’re talking about risky behaviors like drunk driving or risky sex or whatnot. But here, the doctors are the most educated people in the hospital – and the worst at washing their hands! So how’s a hospital like Cedars-Sinai supposed to solve that problem?

 

We’ll save that answer for later. First, let’s take a look at another problem, another instance of where knowing the right thing isn’t always connected to doing the right thing.  Another problem that has really big consequences for society, bigger even than deadly germs. Yeah, I’m talking about money.

 

Alan KRUEGER: I’m Alan Krueger. I’ve spent most of my career as a professor of economics at Princeton. I am currently on leave to be the chairman of the President’s Council of Economic Advisers.

DUBNER: Very good, and the Council of Economic Advisers, to be the chair of the CEA means that you are in the White House talking to the president daily, just about daily about economic policy. Is that about right?

KRUEGER: That’s right.

 

DUBNER:  I called Krueger to talk about the state of our nation’s financial literacy – what we know about handling money, whether we act on what we know, and what the country would look like if people did better:

 

KRUEGER: I think first and foremost, we’d probably have greater savings. People are often in a situation where they have to live paycheck to paycheck. That’s something I think we need as a country to work to improve. Most importantly I think we can improve income growth for the broad middle class. But many people who seem to have the wherewithal to save for the future find it difficult to save. So for example, they don’t take advantage of some of the tax benefits from savings plans, which is really unfortunate because they’re leaving money on the table. And when it comes time to retirement, or when it comes time to needing those savings, they have a very thin cushion. So I think the biggest difference would be if we can improve financial literacy and if as a result people act based on their own personal interest to a greater extent, I think we would see higher savings, which would in the long run translate to greater investment and probably higher income growth for the country.

 

DUBNER:  All right, but what are the stakes here? Maybe we shouldn’t worry too much about all those people who choose to be financially illiterate. It’s their problem, right?

 

Austan GOOLSBEE: I think it’s pretty important at most times, but we saw in this last financial crisis it can become unbelievably important.

 

DUBNER:  That’s Austan Goolsbee. He was Krueger’s predecessor as Obama’s top economist. Which meant that he was around for the darkest days of the Great Recession …

 

GOOLSBEE: So just for your own sake, you know, your own retirement, or your own making sure that you can send your kid to college and this sort of thing, you’ve got to at least know the basics of how to save money, if you’re going to invest the money, where are you putting it, that you’re not taking crazy risks that you don’t understand and things like that. But then, you know,  we saw through the 2000s as we, in some ways, ripped up the rules of the road and took away some of the restrictions that financial institutions had in offering financial products to consumers, there were a lot of people with limited financial literacy who got into extremely complicated mortgages. And those mortgages blew up, and that the magnification of those explosions essentially caused the financial crisis and the worst recession of most any of our lifetimes.

 

DUBNER:  Wow: That’s quite a claim! That financial illiteracy – individuals not knowing what they were doing with their personal finances – helped cause the Great Recession.  

 

Annamaria LUSARDI: I think that financial literacy is an essential skill in today’s society. My research shows that it’s not possible to live and work efficiently in today’s society without being financially literate.

 

DUBNER:  That’s Annamaria Lusardi, a professor of economics at the George Washington University School of Business. She’s originally from Italy but has spent the past 10 years looking into Americans’ financial literacy. It’s not a pretty picture. On a scale of 1 to 10 …

LUSARDI: I describe it as a four , if I have to give a number. I would describe it as insufficient and deeply insufficient in a sense.

 

DUBNER:  Now the good news is that other countries aren’t necessarily better than us. The bad news is that Lusardi isn’t just guessing how bad we are; she knows it from the data that she’s collected. It began with a survey, administered by the National Institutes of Health and the University of Michigan, called the Health and Retirement Study. Lusardi and a colleague were allowed to stick in a few questions designed to see what people knew about money:

 

LUSARDI:: So there were only three. And they were very simple. There was one simple question about can people do a two percent calculation?

 

DUBNER:  Here’s the actual question. See if you know the answer: Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow: more than $102, exactly $102, less than $102?

 

LUSARDI: You know, we wanted to test interest compounding, but we end up really asking people, you know, how much do you get on your savings account if you invest, you know, a hundred dollar and the interest rate is two percent?

 

DUBNER:  The answer is: more than $102. That’s miracle of compound interest. All right, here’s the second question: Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account? The answer is: less than today. That’s what inflation does.

 

And here’s the third question: Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”  The answer is: false! A single stock is more volatile than a mutual fund. OK, how’d you do? Did you ace ‘em? Turns out that only fifty percent of respondents got both of the first two answers right; only a third of the people got all three answers right! And no offense but these are pretty basic questions:

 

LUSARDI: It was a surprise in a sense that we were expecting people not to know very much, but we were surprised by how little people knew given that we were giving this interview to people who were 50 and older. So they had already engaged in probably a lot of financial transactions.

 

DUBNER:  Lusardi was so struck by the sad state of our financial literacy – not just among older people but, as she discovered in later surveys, among young adults, women, and minorities, that she’s become an advocate for fixing this problem. The obvious solution, as she sees it, is to make financial literacy part of our educational curriculum. High school would probably be the best place. Because we all know that educating people about risk is the best way to solve a problem, isn’t it? Isn’t it?

[TEASE: It’s sort of like saying, well we should start teaching everybody to be their own doctor, teaching everyone to be their own mechanic. Not only is it inefficient, but it has this sort of culture of blaming the consumer.]

 

DUBNER: That’s coming up, right after this.

 

[UNDERWRITING]

ANNOUNCER: From WNYC and APM, American Public Media: This is Freakonomics Radio. Here’s your host, Stephen Dubner.

 

DUBNER: So what we’re looking at today is a pair of problems that need to be solved. The first is getting doctors to do a better job washing their hands. The second is to fight financial illiteracy. Now, in each case, it’s an open question of whether education alone is the solution. Annamaria Lusardi, a leading scholar in financial literacy research, argues that education is the answer, hands down. But another scholar argues that not only is financial education ineffective – it can actually be harmful.

 

Lauren WILLIS: I’m Lauren Willis. I am a law professor at Loyola Law School Los Angeles. I teach contracts and consumer law and some related courses. And I research how people actually make their decisions out there in the real world.

DUBNER: Lauren, I’m curious to know, when you tell people that yes, consumers aren’t well equipped to make the right kinds of financial decisions, but that you don’t think that education, financial education is the answer, how do they respond?

WILLIS: Well, I tend to get two very different responses. One is sort of anger that absolutely I must be wrong. You know, I’ve gotten hate mail from people about this. They say it’s got to work, it’s got to work, you have to be wrong, the data must be wrong that shows that it’s not working. And then I also get folks, particularly people who do work in the financial industry and give financial advice, or study consumer behavior in the financial industry and they tell me, you know, you’re exactly right, but you can’t use my name or tell anyone I said that because my firm’s official position is that we support financial education.

 

DUBNER:  Before academia, Willis worked in the Justice Department and the Federal Trade Commission. Lately, she’s argued in a couple of law journals against widespread financial education. She’s come to believe that a little bit of education can give people the illusion they’re better than they are at making financial decisions and an overconfidence that can lead to reckless behavior. She first developed this position after reading a speech by Fed Reserve chairman Ben Bernanke about the need for financial literacy education.

 

[BERNANKE TESTIMONY: The evidence suggests that financial counseling can improve consumers’ management of their credit. My written testimony describes a number of other studies that document the positive effects of financial education and knowledge on financial outcomes.]

WILLIS: And he cited some papers that he said supported the idea that this would work. And I went and looked at those papers hopeful that I would find something that worked. And I was appalled. They absolutely did not prove that financial literacy education was effective, they proved that people liked the classes, they take a survey and people say ‘Yeah I liked it,’ or at least the people that stuck around to fill out the survey. And you know, people are very polite. They would say, ‘yeah sure I’m going to do all those things you told me to do when I get home.’ But there was not real evidence that people actually change their behavior and had changed outcomes.

 

DUBNER:  So we’ve got a puzzle here, don’t we? You’ve got the Fed chairman and one leading scholar saying that education is the way out of our widespread financial illiteracy and you’ve got another scholar saying, Hold everything -- that would be a disaster! So we decided to get these two scholars together for a chat. Annamaria Lusardi in favor of financial education and Lauren Willis against. We began with something they agree on: there are tens of millions of financial illiterates in this fine country of ours, and that’s not a good thing.

 

DUBNER: So, that does sound bad, the fact that you both think that Americans are quite financially illiterate.  But you know, maybe we should just think, you know, too bad for those people, those are dumb people and that what, you know, that’s what evolution is for and capitalism takes care of them. So, you know, anyone who chooses to smarten up, you know, that’s a big advantage for them. What’s wrong with thinking like that?

LUSARDI: I don’t like this kind of thinking very much I have to say. I actually think that people are very smart, and they try to do the best of what they can do, but I think it’s very expensive to acquire financial education. And that’s why, you know, for the normal literacy we have set up school. Imagine a world where, you know, we don’t have school and people have to do the education themselves. It’s very expensive and very inefficient. And third, there is an externality; there is a cost to society of what other people do.

DUBNER: So, Lauren, it sounds as though you have a lot of respect for Annamaria’s research, but what do you think when you hear her describe this new curriculum that should be taught in schools throughout the land of teaching children and then older teenagers and adults to be financially literate? You think that’s a good idea?

WILLIS: The problem is we are just not going to commit the resources that we would need to do that. You know, we currently don’t teach people how to do math terribly well. And I actually think math makes a difference, just plain old math. There are studies that show that folks with basic math skills do better financially later in their lives. There is no evidence that people who know the difference between a stock and a bond do better later in their lives as a consequence of being taught that. It’s sort of like saying, well we should start teaching everybody to be their own doctor, teaching everyone to be their own mechanic, you know, something like that, terribly inefficient to do that. Not only is it inefficient, but it has this sort of culture of blaming the consumer. You know, you’re the one who didn’t figure this all out. You, you know, didn’t go to the classes or didn’t pay attention, or whatever. And that’s not going to help in the long run.

DUBNER: So your position then is what? So if you say, Lauren, that Annamaria understands that problem quite well, but that really she’s attacking kind of the demand side, and really it sounds like you’re identifying a big set of problems on the supply side. So, if that’s the case, what do you propose?

WILLIS: Well, a few things: one is I think we’ve moved to a point where financial decisions are complex because there are complex products out there. It’s not just to fool people. I mean there really are good complicated products out there and good complicated decisions that need to be made. We need to train and regulate a cadre of financial advisers, neutral financial advisers that are not going to be conflicted by also being salespeople.

DUBNER: And these, and these people are employed by whom then?

  

WILLIS: Well it would have to work in a similar way to other professions. And so there would have to be some folks that were doing pro bono work as well as it would simply need to become also something that people expected to pay some kind of flat fee for to get financial advice.           

LUSARDI: I’m not advocating people to become their own doctor, or their own mechanics, or lawyer, but you know, we have to educate people to ask the right questions.

DUBNER: And Annamaria, when you hear Lauren say that your idea for educating people, for giving them more financial literacy in let’s say the school system for over the course of many years, when you hear her say that your proposal for that is just too expensive, and cumbersome, and it probably won’t work on top of that, what do you say to that?

LUSARDI: Actually this is exactly what people always tell me, you know, “It’s expensive to do financial education.” I think it’s expensive not to do financial education. And we have just seen the consequences of that. Think of how expensive has been the cost of this financial crisis. You know, a lot of people tell me that, you know financial education is very difficult and I love this analogy of driving, because you know, driving is also very difficult and look what we have done. We have put 15-year olds on the road. And imagine what could happen if you were putting people on the road without giving them a driving license, without checking that they are able to drive. Imagine that.

DUBNER: Well, also there’s the assumption that just about anybody can be taught what might look from a distance like a rather complex set of skills -- driving a heavy car, right?

LUSARDI: Yeah, and you know, we are not asking people to drive in a Formula One race. Once we give you a driving license it’s not that we expect you to drive a Ferrari together with Schumacher and show that you can do that. What we are only asking you is to go slow and to be able to reach your destination, and you know, not to have accidents that can hurt you and others.  

WILLIS: So, I think the problem actually is that the current world we live in does require people to, you know, act like they say they are the driver analogy, that they’re Formula One…

DUBNER: Michael Schumacher.

WILLIS: ...drivers, right? I mean, let me just read you from the Federal Reserve Board consumer handbook on adjustable rate mortgages. “To compare two ARMs, adjustable rate mortgages, with each other, or to compare an ARM with a fixed rate mortgage you need to know about indexes, margins, discounts, caps on rates and payments, negative amortization, payment options and recasting your loan.”  And so what we’re expecting from people is, in fact, Formula One.

DUBNER: Do you think that people should be, for instance, required to have some kind of financial license before they can get a credit card or take out a mortgage?

WILLIS: I think if you did that then many law professors could not take out mortgages or get credit cards.

DUBNER: Now, let me ask you both to assess your own rate of, or your own level of financial literacy, with one being wildly incompetent and ten being a financial master. Where do you each rank yourself there?

WILLIS: Well I would rank Anna a ten, but…So, I would rank myself about a five.

DUBNER: That’s it! Really?

WILLIS: But the truth is I don’t have to be very financially literate in order to get along very well financially in life. I don’t have to carefully budget and know exactly what’s going on in my finances because I earn enough money that I’ve got a little cushion. My employer radically narrows my choice set and guides me to good decisions by giving me retirement plans, and life insurance, and those sorts of things. And so I don’t have to be very financially literate, because the world is actually set up to help me quite a bit.

DUBNER: At least your fairly narrow, wonderful corner of the world.

WILLIS: Exactly, exactly.

DUBNER: And you want to make the rest of the world a little bit more like your wonderful corner.

WILLIS: Exactly.

DUBNER:  So where do you come down in this debate? Is financial illiteracy something that should be fought on the demand side, through widespread education, like Annamaria Lusardi suggests? Or on the supply side, through better regulation of financial instruments and a new cadre of financial advisers, like Lauren Willis wants? It seems obvious, to me at least, that some combination of both would be much better than nothing at all. I get Willis’ argument that widespread financial education might be a massive waste of money. And sure, I can get behind her call for more transparency in financial products. But do we really want to rely upon a bunch of pro bono financial advisers to get people out of their messes? The fact is that financial illiteracy is a hard problem to solve. It requires a fair amount of knowledge, a good bit of willpower – and it probably calls for some creativity. Like other hard problems.

 

Remember the situation at Cedars-Sinai Medical Center, with doctors not washing their hands? Dr. Michael Langberg says their hand-hygiene rate was about sixty-five percent …  

 

LANGBERG: That would mean that 35 percent of the time it wasn’t being done. And that translated to our medical staff as potential harm.

 

DUBNER:  So what do you do? The doctors are the best-educated people in the hospital, so it wasn’t as if they didn’t know the danger of carrying around bacteria on their hands. Cedars-Sinai tried a bunch of ideas that seemed to make sense: putting up signs and sending out e-mails; handing out bottles of hand sanitizer; even awarding $10 Starbucks gift cards to doctors who did wash their hands. But none of this boosted the handwashing rate. So rather than moving forward, Cedars-Sinai took a step backward:

        

LANGBERG: We had an effort to prove to the physicians that, believe it or not, physicians’ hands can carry organisms. We would go to the leadership of the medical staff and ask them if they wanted to have their hands cultured, for example, and they did. And they were cultured, and some of them were pretty ugly.

 

DUBNER:  That’s right. The docs were asked to lay their palms in a petri dish with an agar plate, which was then sent to the lab to see what was lurking there. After two days of incubation, the petri dishes grew a bunch of yellow bumps in the shape of a hand – bacteria. And that’s when the hospital’s chief of staff made a clever and creative decision: to take a photo of one of those disgusting, bacteria-laden palm prints and make it into a screen saver on the hospital’s computers. Langberg says the staff was shocked.

 

LANGBERG:Ugh!’  Or ‘ooh’  Or ‘that’s disgusting.  I can’t believe that was on my hand. I can’t believe I didn’t know it.’

 

DUBNER:  The screen saver did its job: the handwashing rate shot up to nearly 100 percent. But to keep the rate high, Langberg says, Cedars-Sinai has to be vigilant, has to keep introducing new measures. Like … strategic placement of hand disinfectant.

 

           

LANGBERG: So we’re walking outside my office, and you can see right there my assistant has a large bottle of Purell. You take two steps over here and my colleague on his table has a bottle of Purell.  Walk this way. The entrance to my office suite has a bottle of Purell.

 

DUBNER:  And it’s not even enough just to be vigilant; sometimes you’ve got to be a little wicked too. How about a little shaming? That’s right – the names of doctors who failed to wash their hands were made public during departmental meetings.

 

LANGBERG: The first time it happened, I think subsequently other people in the room are texting the individuals to say,  “Do you know that your name was up here for having been caught not doing hand hygiene?” And as much as you want to reward people for doing it, these kinds of consequence, um, actions have had a really important impact on the way in which physicians are really aware of hand hygiene.

 

DUBNER:  It’s humbling, isn’t it? To think that the best-educated people in the hospital need to be tricked and shamed and even frightened into washing their hands. It shows just how hard behavior change can be -- whether it’s hand-washing or something like learning how to do a better job with your personal finances. We like to think we can flick a switch, make a resolution, maybe take a course -- and suddenly we start doing the right thing, the responsible thing. But it can take all kinds of incentives -- all kinds of carrots and sticks -- to make that happen. What if we used the kind of tricks that Cedars-Sinai used for hand-washing to try to increase our financial literacy? What if your 401(k) paperwork came with a tin of cat food -- to remind you what you might be eating in old age if you don’t learn a bit more about investing? What if your adjustable-rate mortgage application came with a picture of the future you, living in a cardboard shack on the sidewalk after you fail to keep up with your payments? What if, every time you buy a lottery ticket instead of putting some money in the bank … [FADE OUT]

 

[CREDITS]

 

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COMMENTS: 56


  1. Mike B says:

    Arguing against financial literacy, saying it is better left in the hands of advisers, is like saying people shouldn’t learn how to cook because they can just eat out all the time. Learning how compound interest works or present value works isn’t hard and we would all be better off if people has some basic knowledge about finance.

    Well-loved. Like or Dislike: Thumb up 52 Thumb down 3
  2. Michael says:

    OMG, listening to Lauren Willis argue that Financial education is bad gave me a window into the period before the reformation and enlightment – “ignorance is good.” The fact that she argued that people in the financial services industry were the ones who supported her view was even more testament to how bad her ideas are.

    We are living during a tectonic shift in financial security for Americans. My parents generation path to financial security was: stay at job for 40 years, pay off your house, collect pension. That’s all theyhad to know about Finance.

    That era is gone. With the elimination of Pensions and job security people have to fend for themselves and negotiate a complex world of Finance. Most people are ill-prepared for this. And sadly there was a growing world of financial service companies (brokers, mutual funds) who have stepped in and have financially raped millions of people with hidden fees and lousy products (I worked in that industry and left). I remember showing my father in law on a computer how his broker – from a nationally known financial services company – was killing him with expensive funds, hidden fees, transaction costs, churning his account. He was dumbfounded. It’s not wonder this group would say financial education is bad: nothing is worse for business than an educated consumer.

    Lauren Willis has not thought through her argument.

    Lauren, please post your address so I can send you a t-shirt that says: “Ignorance is good.” Because you exemplfiy that motto.

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    • Greg says:

      I believe Lauren’s point was not that Financial Education is “bad”, but that it’s ineffective, or at least far less effective than other potential options. If you read books like Nudge, there are plenty of examples of setting up financial products and systems paternalistically, to help customers make the decisions they want to without having to be financially literate. By requiring financial literacy to make decisions for which the answers are already known (i.e., most will tell you they want to save more), we have set ourselves up to fail.

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  3. steve thompson says:

    I like this article. financial intelligence is of great interest to me. What I really smiled at, though, was the description of the hand print growing bacteria in the petri dish. I work in pharmaceutical manufacturing (putting sterile drugs into sterile bottles) and we are required to be tested every time we enter the ‘clean area’ – our fingertips and the outsides of our clean room suits are touched by growth medium (agar) in plastic petri dishes. If you fail you are disqualified from re entering the ‘clean room’ until you prove that you can keep yourself clean.

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  4. Shane L says:

    I had thought that some of the illiteracy over financial matters was actually a rejection of quite common sense, old-fashioned ideas that most of us are familiar with.

    - Waste not, want not.
    - Don’t put all your eggs in one basket.
    - The early bird catches the worm.
    - Neither a borrower nor a lender be.

    That is, work hard, avoid debt, invest savings in a few places, spend frugally and you’ll probably be fine. Do people really need a much more sophisticated financial education than that?

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    • 164 says:

      Absolutely Shane L., simple but true. But none of this makes money for the financial service industry.

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    • kv63 says:

      This comment proves why we need better financial education. This line of thought would have served you fine 100 years ago, but they are actually not sufficient and not necessarily even advisable anymore. When you put your money in a bank account you are effectively lending it to them and in return they pay you an interest rate. If you do not put your money in a bank account you are actually losing money when you take into account inflation.

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  5. John J. says:

    Hidden due to low comment rating. Click here to see.

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  6. econobiker says:

    How about rolling the financial regulations back to what they were before all these corporations, lobbyists, and greedy politicians got to gutting the regulations?

    Perfect example was banks moving to debiting checking accounts in the highest to lowest amounts rather than in the order presented. This was done to increase fees to the consumer. If something as simple as this changed in orer to profit a corporation, deeper financial issues can not be solved by more education. Same figures for the rise in payday loan businesses and rent to own businesses.

    “but it has this sort of culture of blaming the consumer. ” Here is another issue- some of the anti-debt folks (like anti-debt guru Dave Ramsey) will not lift a pinky finger to oppose the system even in their own back yard since they profit from the consumer abused by the system as it is now in place.

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  7. danny says:

    there’s a big difference between teaching washing your hands often will help you prevent as many colds, versus teaching everyone to do brain surgery.

    equally, there’s a big difference between just teaching everyone some basic financial literacy, versus teaching everyone to manage a mutual fund. that lady is crazy.

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  8. rageon says:

    “It’s sort of like saying, well we should start teaching everybody to be their own doctor, teaching everyone to be their own mechanic, you know, something like that, terribly inefficient to do that.”

    In my opinion, it’s nothing like that. Yes, it would be innefficient for everyone to spend 3 years in medical school. But it’s still a good idea to teach people how to do the basics: learn the purposes of over-the-counter meds, know how to stop bleading, etc… And know the difference between something you can do yourself and something that needs medical attention. Same with mechanics — everyone really should know some basics, if for any, just to avoid having to pay someone to do routine stuff (like changing wiper blades).

    Same with financial education. I don’t need to know exactly how everything works. But I’m certainly better off knowing the basics. I can figure savings, make simple investments, do my own taxes, and accurately calculate how much house I could afford. You do not need an expect for such things. But if I was playing with millions of dollars, I would also know enough to get some help from time-to-time.

    As with just about anything, the best answer here probably falls somewhere in the middle. Become an expert in the field that’s going to pay your salary, know enough to get by in the other important areas, and know when to ask for help.

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    • Patrick says:

      This seems exactly right. An amount of basics in many fields is a very good idea, even though, of course, no one can be an expert in everything. Nor are there only two levels in the best version, mind. To return to medicine: an accountant, a lifeguard, a nurse, and a doctor, benefit from different levels of medical training. The median lifeguard really should know more first aid than the median accountant because it’s more use to them.

      Nor is the knowledge of course strictly about better. An EMT and a pharmacist both have use for medical knowledge not common to the general population, but it’s not the exact same medical knowledge. Pharmacists need more overall, but don’t need to know as many techniques for preserving life in acute emergencies as an EMT.

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  9. James says:

    Why is it inefficient for everyone to be their own mechanic? I’ve always done almost all of the mechanical work on my cars, everything from oil changes to complete engine rebuilds. In addition to having saved me many thousands of dollars over the years (and that’s only the cost of honest mechanic work, not the occasional shop that sees a sucker walk in the door), it’s provided intangible benefits such as recreation and a sense of accomplishment & self-sufficiency.

    It’s the same with finances: I may not want to spend the time necessary to wisely invest in individual stocks, but I can certainly pay attention to market trends, pick low-overhead mutual funds with reasonable long-term policies, not put everything in one get-rich-quick fund, and – most importantly – not panic and sell everything when the market drops.

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    • Syd says:

      You night be able to service your own car, but that comes at the expense of something else that someone else can do better than you. It takes time to learn any skill. Maybe my bicycle is in better shape than yours. Maybe I paint my own house or build my own furniture or grow my own vegetables.

      Nobody can be good at everything that it’s necessary to do. And for that matter not many people have the time to be competent at even the majority of things that it’s necessary to do. That’s the reason we have specialization at all, so that we can exchange skills and products instead.

      I agree with you that anyone who has a basic understanding of finances will probably tend to function better in someone who doesn’t, but there’s nothing unreasonable about pursuing other things.

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  10. John Mulholland says:

    Wouldn’t this be a state issue? There is not power in the Constitution for this.

    The biggest problem I see is government policy which enables financial idiots to be reckless, especially through the massive credit expansion of the federal reserve.

    Would education have helped? Many of the “financial experts” were also fooled.

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  11. Daryl Spitzer says:

    What is that hauntingly familiar (and haunting) music used at the beginning of the podcast (and again later on)?

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  12. Skean says:

    Lauren Willis fails to even acknowledge some of the reason everything is so complicated in financial investing; lawyers.

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  13. Erkan says:

    Mr Levitt is right. We, the listener of your podcast should be very thankful for your good podcast. Thanks a lot from Germany. I am getting a lot of insight and knowledge. Not always “need to knows” but a lot “nice to knows”, which I can apply in conversations with my network.

    Concerning hand washing hygiene, also here in Germany this problem persists. I had some hard discussions in the past about hygiene with my friends, especially doctors. They were doubting about my hygiene concern. I will suggest them to listen to this podcast.

    Thanks and best regards, Erkan.

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  14. jimmsans says:

    EDUCATION IS NOT THE ANSWER!!!!
    Education is only a means to an answer not the answer itself. People need to be motivated to employ education (financial literacy). all the education in the world can not make you successful with out being motivated to use it.
    the true question should be not “why are people not educated” but “why are people not motivated to use education?”

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  15. ScottP says:

    Nice….The next car I buy I will let the Car Salesman educate me on all I need to know. Wrong!

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  16. Dennis says:

    I was confused by the financial literacy questions mentioned in the podcast. I heard the first question as: If you have $100 in an savings account that has 2% interest and you leave it for 5 years, would you have more than $102? I agree the answer is “yes,” but Dubner’s line “that’s the miracle of compound interest” doesn’t make sense in this context. Even if the interest didn’t compound, you would still have $110 after five years, which is more than $102. (If the interest compounds annually, you would have 40 cents more…) This makes me wonder if the question was stated properly.

    More annoying is the third question, which compares buying a single stock versus buying a mutual fund. The answer given is that a mutual fund gives a “safer return.” However, I don’t think that takes into account that mutual funds charge a fee, whereas some stocks pay a dividend. Listening again, I guess there was a carefully placed “usually” in the question that swings the tide towards the mutual funds, but it certainly seemed ambiguous when I first heard it in the car.

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  17. William Roe says:

    Would you mind crediting the music? I want to know what the first piece of music is.

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  18. Andy Long says:

    Like many I was at first shocked by what Lauren Willis had to say, but then looked into it a little more. If you look at some of her academic papers, she is saying that in general financial education isn’t efficient. Many don’t want to participate, while for others a little knowledge is dangerous, and for some the psychological factors that affect their financial decisions can be a lot more complicated that what can be covered in a semester long high school class. She argues to be effective there would have to be unbiased financial advisors to help education everyone on their own situation. This would be very expensive and it might be more efficient to change regulations or other policies that wouldn’t let people make poor decisions. This wasn’t even her intention when she started looking into it, but most of the academic work supports her arguments.

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    • bridgetc says:

      Who pays for the advisors?

      Who watches the advisors to make sure that they’re not profiting from their client’s ignorance?

      Who pays for the watchers?

      I’m not understanding her inefficiency argument to be honest. My drivers ed teacher taught me enough about cars to know what can go wrong, what can be easily fixed and what needs a mechanic. It was an afternoon well spent.

      And I certainly don’t know enough about medicine to be a doctor. But I know enough not to be running to the doctor for every little ailment.

      How is it not more efficient for me to take care of the small problems which don’t require expert knowledge & training than to clog up my doctor’s office and my mechanic’s garage with tiny issues?

      The same goes for finance. If you need a CPA to understand your mortage, you need a different mortgage. You need enough financial literacy to be able to separate the wheat from the chaff and credit cards & mortgages should not be that difficult to understand. For example, I had a friend who thought the car dealer was being so wonderful taking in her old car and loan and rolling it over.

      I shouldn’t have to explain negative amortization to a grown up.

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  19. Sage says:

    Hi! I listened to freakonomics today & found myself yelling out loud for the opportunity to become financially literate. I am consciously incompetent when it comes to my finances, I know I don’t know anything. I want to learn & it would be awesome if you could do a show that talks about how to become financially literate, at least provide some resources.
    This weeks show just made me feel like an idiot- worse actually- a helpless & hopeless idiot. While I may pass the quiz & don’t pass the test: no retirement fund, a handful of debts, & a bazillion questions about how to run a business & set myself up for a bright financial future plague me.
    I know I don’t know how to manage my fiances & I want to learn, to empower myself to at least move the car (I don’t need to hit the race track!). Most Americans are not irresponsible drivers because we have had defensive driving drilled into our practice. That humility & judgment can certainly translate to our financial knowledge if we are given the chance to learn. Of course there will always be people who take risks & invest irresponsibly, but isn’t that already happening out of our ignorance? Sounds like we as a country have nothing to lose by learning how to pay attention to our financial situation. Do you have suggestions of where to look to learn how to learn about the language of money? I’m tired of being illiterate.

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    • michael says:

      1. The Only Investment Guide you’ll ever need – Tobias
      2. The Four Pillars of Investing – Bernstein
      3. A Fool and His and Money – Rothschild
      4. A Piece of the Action – Nocera

      Video: “Maxed Out”

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    • bridgetc says:

      Michael’s choices are good.

      You might however want to start out with Jane Bryant Quinn’s Making the Most of Your Money.

      It breaks down understanding money into baby steps. Once you’ve understood the baby steps, Michael’s books will make more sense.

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  20. Vince says:

    I have to take issue with this podcast, which I think was based on a premise that was poorly thought-out. To put forth the idea that our recent economic crisis was brought on simply because poorly educated people got in over their heads with risky mortgages is insulting to Americans. Of course that was part of the problem, but you can’t simply eliminate factors such as predatory lending.

    It is not unreasonable (or a mistake of the uneducated) for someone to rely on experts to properly inform them of the risks of a particular investment, and absent the integrity of those folks to be truthful it is unfair to place the blame on someone who may in fact have questioned the mortgage product being suggested by the lender and received assurances that it was OK. I could go into further detail, such as banks using pre-tax income and unrealistic income/expense ratios to qualify purchasers, but I think you get the point.

    I understand your hand washing example and I understand the issue with financial literacy, but using the mortgage crisis as the precarious line drawn between the two was a mistake, imo.

    Vince
    Brooklyn, NY

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  21. Danny Chamovitz (@DanielChamovitz) says:

    I was struck by what Lauren Willis said about most people not having the capability of understanding financial material. You went on to list a bunch of financial jargon that few of us can define.

    This paternalistic approach is really no different from much of society’s approach to people with intellectual disabilities. This could be a great lead in to a new podcast on accessibility and language simplification. I’ve become attuned to this issue since my wife has been instrumental in defining a framework for accessibility for people with intellectual disabilities (Shira Yalon-Chamovitz (2009) Invisible Access Needs of People With Intellectual Disabilities: A Conceptual Model of Practice. Intellectual and Developmental Disabilities: October 2009, Vol. 47, No. 5, pp. 395-400.). The key issue here is that language simplification helps everyone, not only those with intellectual disabilities. When she was pushing forward legislation on language simplification, the biggest fights were from financial institutions, who profit from our ignorance. Something to think about (also museums were reticent, but that comes from intellectual arrogance, which may be no different).

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  22. Al H says:

    Wow, Lauren Willis has sure missed the boat on this one – typical lawyer logic. Lets teach high school students things like the periodic table, or how to calculated the angle of obtuse triangles. Those are things we will all be using for the rest of our lives – don’t you think. Now to think that teaching students how to balance checkbooks, or understand compound interest, or basic economics is too costly to schools????

    Also, if you need a financial planner to explain your new mortgage terms, then I think you better not take out that mortgage. The banking system has gotten so convoluted that Ben Bernanke can’t keep things straight. Perhaps we need to tie the interest rates to derivatives.

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  23. Jeff Bowen says:

    It is true that managing money is complicated and risky. But while some people can choose not to drive a car, everyone has to manage their money. Sometimes we have to manage other people’s money too,such as our children or parents. I think the idea of a license or permit is good. You might have a permit for Vanguard index funds, or large or madcap stocks. More training would permit you to purchase small cap stocks, ETFs, and adv level for buying and selling puts and calls?
    This is the first person I have ever heard on NPR or anywhere that advocates against people getting education or training! Very elitist!

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  24. stacy says:

    When I heard Ms. Willis’s idea I thought she was …well wack. However, after hearing her I realized she is advocating the same idea that frustrats me with the publix school education of my son. Focus on the education quality of basic consepts like math, morals history and science. When we make sure that we educate strong basic skills we can foster strong common sense and effecient self preservation skills.

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  25. Aaron says:

    This seems like one of the top three topics of the decade.

    Personally I benefitted enormously from Dave Ramsey’s Financial Peace University – a 13 week course on a range financial topics – budgeting and beyond. That program is 2 hours per week and costs only $100 for the whole thing.

    While I appreciate the car mechanic analogy – a lack of car repair knowledge is unlikely to have the same long term consequences as financial ignorance.

    Grateful for Freakonomics,
    Aaron

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  26. TDA says:

    Sometimes the logic on Freakonomics gets in the way of the story for me. Comparing doctors, who as the podcast points out are the most highly trained in their world, to the average financial consumer just feels a little off the mark. The better analogy might be to compare doctors to the Wall St. folks, the most highly trained of the financial people. We want doctors to wash their hands because of the damage they can do to other people. We want finance people on Wall St. to make financial decision that will help everyone. The analogy should be more like a patient goes to a doctor to get better (not to have his/her dirty hands make you sick), and the average citizen goes to Wall St. to invest for his/her future security (not to have his money used and lost). The doctor doesn’t suffer from not washing his hands, so he doesn’t change his behavior. Wall St. doesn’t suffer, they get bailed out, so they don’t look out for the investor. It is Wall St. that should be punished for bad decisions, not the average person who invested in Wall St. Not to mention that we have presidents who tell us to be good Americans by spending and not saving. That’s another story but one that begged to be mentioned when this podcast told us that the average person is financially illiterate – why wouldn’t they be when they don’t even good advice from their leaders? And we’re being told to spend while real wages are going down, so you do what your president and culture are telling you to do by going into debt. It often feels like Freakonomics misses the bigger point that could be made.

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  27. Joe says:

    While I agree with Ms. Lusardi’s idea of increasing financial education it will, unfortunately, never occur. Financial education at the high school level will never happen because it is not part of the core curriculum (English, math, science, etc.) for graduation and/or preparation for college and there is a lack of funding, political support, qualified teachers and approved curriculum. Then again, why don’t we extend Ms. Willis’ idea of not teaching financial education and free up some resources to teach financial education by cutting a few subjects at the high school level. Hey, you don’t need four years of English. We’ll make it three years. Why? Well, we can let the English majors write stuff so you don’t have to. We can also let the Math majors do all the math so you don’t have to and therefore cut a year of math from high school. Now we do the same for science and history; we can probably cut political science and economics altogether. With all of these cuts, thank you Ms. Willis for the idea, one should now be able to fund financial education at the high school level.

    As for the level of financial education one has and their ability to succeed: To succeed you need education and/or training and the ability or resources to use that education/training. Knowledge of investing, IRAs, compound interest, etc. is great but it is of no use if you if you don’t have a job and you’re broke.

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  28. Mumbo Jumbo says:

    The reason that nurses wash their hands more than doctors is that they’re actually trained to wash their hands, there’s way too much material to cover in the 4 years of med school, so doctors wind up never really thinking about it. If you put enough resources toward teaching doctor’s to wash up, they’d do it.

    Also, doctor’s have the cleanest job in the hospital. Who do you think is going to wash their hands more, the doctors who chat with the patient from a safe distance and then order labs or the nurse who cleans up poop on a daily basis?

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  29. Ben says:

    Thanks for the awesome podcast.
    What is the music which was played in the background? Thanks

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  30. M. Jane says:

    Really? Austan Goolsbee thinks that the _cause_ of the US is in a recession is due to poor mortgage decisions by individuals? Ah, hello unfunded wars and massive broken pensions, companies that can legally sell and sell short the same MBS, and and and… brought to you by our lawmakers. Those in the know, those who claim to be literate should go look in the mirror, pulease freakanomics. The fact that this man was the top economist blaming the whole of the financial meltdown on individuals truly is scapegoating in its ugliest form. That individuals have not held their lawmakers accountable, this could be laid at the feet of individuals–but the cause of the financial meltdown and boondoggling rescue attempt with no strings attached money give-away, come on!!!!

    Just a few facts as foder: Private, competitive mortgage securitization is believed to have played an important role in the U.S. subprime mortgage crisis. (Wiki) Wars in Iraq & Afghanistan: The final bill will run at least $3.7 trillion and could reach as high as $4.4 trillion, according to the research project “Costs of War” by Brown University’s Watson Institute for International Studies. (www.costsofwar.org) The landed cost of a gallon delivered to the front lines for our troops in Afghanistan cost more than $400. (Politifact Ohio) There’s lots more for Goonsbee to research should he like to try to make some more guesses on what “caused” this recession, speaking of literacy.

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  31. Lifestyle Of Change says:

    Financial illiteracy is only part of the reason the “Great Recession” occurred. As we learned earlier in this podcast, many people even if people knew that spending their money in a detrimental ways would cost them their financial security or even their houses, that they would still spend it in these ways. We’re stubborn and all know-it-alls!

    That being said, education is key, key, key. Advancements and progressive trends in innovation, economics, and other topics only come from learning further and learning more. Basic economics and even math in this country on a global scale is VERY low. We’re dependent on others to do everything for us, whether that be changing a tire, or saving our money for us. I miss the good old days when someone could manage their own life without having to call, text, or email somebody for help.

    Learn on,

    Lifestyle Of Change

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  32. Peter says:

    You did not touch on why nurses performed better than doctors in hand washing. I suspect that it is for the same reason of organisational culture that afflicts other occupations as well. In short, they say to themselves, infection comes from the plebs, we are superior and are above such considerations. For instance, surgeons are notorious for being above criticism. So are airline pilot captains, some of whom accept no advice from their copilot even when safety is concerned and it is the copilots responsibility to do so. There is enough here for another programme as there is much effort in aviation to change such attitudes.

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  33. John says:

    I think a big point has been missed here. Hand washing and financial management are examples of people’s habits. Of course a 16-week course that meets for one hour once a week will have little effect on a person’s habits. The way we can change it is to ‘practice’ good financial habits from a young age.

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  34. muffintop says:

    Education doesn’t always work, but fear does ;-)

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  35. David Dolinsky says:

    I was dismayed at the credence you lent Lauren Willis in the program about economic literacy. Neither she nor you offered any studies to support her claims, yet her opinion was treated as valid. The concept that people tend to learn enough to enough to be dangerous to themselves was simply never proved in the discussion.

    I do not know the detail of an ARM mortgage, but I know that it can change, most likely not in my favor and therefore have avoided them. I believe some people who suffered from ARMs gone bad ewer lured with the appeal of a low payment and the dangers weren’t made clear. I feel some of them may have benefited from a better understanding of the fact that it could change for the worse. I also concede that some would have still taken the chance.

    But I feel you do a disservice by promoting the no education is better theory.

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  36. Sonya Jaworski says:

    My 8 year old daughter after listening to the hand washing part of this asked “so if you don’t wash your hands when you go to the hospital they make you eat cat food?” I think there was some confusion with your tying together the Cedars Sinai story with including a can of Friskies with your 401K paperwork. I love your show, keep up the good work!

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  37. Nune Boyadjian says:

    I just wanted to comment on something a guest said on this particular show about how her “employer radically narrows [her] choice set and guides [her] to good decisions by giving [her] retirement plans and life insurance…” Employers are the WORST at providing these benefits and they do not give good choices because just like any other fringe benefit, that is not the employers expertise or job. She ranks herself about a 5 at financial literacy, I would have to agree. Not because I am a Financial Advisor myself, but because of what I know now before I was a Financial Advisor, everyone should really sit down with an FA and talk about these things. AND NEVER EVER RELY ON YOUR EMPLOYER.

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  38. Mika Wyatt says:

    Sent to Dr. Willis – Hello Dr. Willis:

    Heard your segment on Freakonomics…..I believe it is intellectually lazy. It is good to know finance. It is good to know more about cars (without being a mechanic) to keep air pressure in your tires, where the owner’s manuali located, to know that you need your oil and air filter changed….and golly maybe to even know how to adjust your seat to be able to drive better. No, we do not need to be medical doctor but we know we should not smoke, and if you know what is a better food to eat than others and yes you need to exercise – WOW you are in better control of your health. I believe it is shameful that you do not have a better appreciation of encouraging people to be better learners in all things. If people do not understand certain financial products – they can learn or they should not invest or borrow.

    There is free (or very close) financial education that is available nationwide – Dave Ramsey….radio, books, and emails.

    PS…who in the hell is gonna pay the pro bono financial advisers? Taxes….oh Lordy – let the government take care of all of us! Utopia. Get ready to be controlled and screwed!

    Thanks and God Bless the USA!
    Mika

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  39. music fan says:

    Odd question, but what’s the piece of classical music used to introduce this episode?

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  40. ash says:

    The heart of the matter is that at some point in most Americans’ lives we will get a credit card, take a loan, make an investment, purchase a car, come across APR vs. APY, and be inundated with soundbites about the nasdaq being down, futures being up, and how the yen is doing.

    Being in school for finance, I know that all of this is not relevant. There’s no necessity to teach people about futures indices or how the NASDAQ is calculated. Here, I agree with the argument that ann (?) makes saying “it’s like teaching everyone to be their own doctor, or own mechanic.” It’s kind of like that, but not really.

    Now while the average person shouldn’t be taught to diagnose a series of common ailments, should they not be taught on how to evaluate how and when to get a credit card? How the simple principle of compound interest works? Even how a mortgage works and based on their income range, the types of home prices they should look for? She makes the claim that financial advisers exist, but tell me the last time you went to your financial adviser to find out the difference between APR and APY.

    Ann(?) also makes the point that financial jargon (which is exactly what it is) requires a trained cadre of savvy financiers to understand–citing a book by the federal gov’t which discusses some difficult mortgage terms. To be frank, a lot of financial terms are dressed up to make it seem more difficult than they are, and only a simple understanding of basic principles is what’s necessary.

    She claims that we should train a group of people to be knowledgeable financiers, working for the people and who aren’t conflicted as salespeople. I’m not sure if she emerges from under a rock to do this podcast, but it seems pretty naive and idealistic. Clearly she’s never sat down with a chase banker (or sales rep).

    In the end, I think the argument that finance is something that is incomprehensible to the average american, as well that it’s difficult to expend resources in teaching it is weak. We’re seeing this model of education and simplifying these concepts take off with wild success (learnvest and mint), and can only hope we’ll find a way to bring such information to our classrooms.

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  41. Shyam says:

    I am a big fan and a regular listener of the podcast. But, I was not sure where this particular edition was going. I heard two very relevant and interesting issues…..but failed to see the connection. Could do more to tie things closely and make the analogy little clearer.

    Thanks!

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  42. Ali Nejadmalayeri says:

    I very much liked the podcast. Interestingly, I blogged about hand washing and risk0taking before I heard the podcast (http://wp.me/pjWs9-4q). So I used this podcast as a basis for a follow up blog (http://wp.me/pjWs9-5y). I think the main problem is that in one hand we are assumed to be rational creatures making decisions based on a combination of evidence and knowledge which can changes over time. But we are also emotional creatures who makes decisions based gut feeling and what we feel is right. The irony is both have flaws and both have values. Our emotional side, mainly driven by our lizard brain, helped our species survive the predators who were hunting us. Our rational side is what brought us out of the dark ages to the enlightenment. We do need both and we do live with both. I suppose the ultimate solution, as it was the case with hand washing problem in Cedar Sinai, is a combination of education and behavioral modifications. Of course, at the end, we all need to honest with ourselves.

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  43. Mike Finley (CMPW) says:

    I certainly side with the advocate for bringing financial literacy to the masses. I am currently doing just that. I teach financial literacy at the University of Northern Iowa every Monday night during the semester. I use 25 years of financial knowledge and action to provide insight on investing, saving, credit, debt, taxes, home buying, car buying, and that bugaboo they call advertising. College students and individuals in the community show up each week to further their financial education as I teach it as well as outside teachers. The key word is teachers. Salesmen are not allowed in the club which is one of my overriding messages. You cannot trust people who have a conflict of interest with the information they are providing (commission based and fee based are not invited, but fee only is). My carrot is a financial question each week where someone will win $100. At the end of the semester I provide an exam where someone will win $1,000. These motivators bring people in to the club, but they stay because of the education they are receiving. I use the pink wig as a symbol that you must be willing to stick out from the crowd if you want a financially free life. By the end of the semester, many students are sold on the idea that keeps getting pounded home. The message? I am the answer to my financial life!

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  44. Jan says:

    Annamaria Lusardi is an educated economist asking for greater education and Lauren Willis is an educated legal schollar arguing against it; yet neither can’t speak a fluid thought ? Here is an idea: along with financial education let’s also reinstate speech as a requirement in the schools. Why won’t we? It is because the general public (that is only required to be educated to an 8th grade level) doesn’t see anything beyond teaching the basics in school as being economically beneficial.

    My two biggest pet peeves when I hear [supposedly] educated people speak: 1.) inserting ‘you know’ in the place of a comma in a spoken sentence and 2.) starting out a sentence with ‘I mean’ in response to a question when they haven’t said anything prior to it that requires an explanation.

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  45. emily says:

    I think it’s a Goldilocks situation. People need to be educated just enough to take care of the basics and understand the incentives, plus a little extra education in how to understand when they are out of their depth.

    Showing high school kids compound interest calculators and how to calculate how much something will cost if you buy on credit and pay the minimum is a terrific idea. So is explaining about 401ks, employer match, and the tax differences between a Roth and a regular IRA.

    If your average high school kid knew that (at minimum) they should be putting enough into their retirement funds to get full matching, and that if they don’t want to be bothered thinking about it they should just choose a target retirement date fund, that would already be a huge improvement over the current situation.

    Add in a lesson on the BAD side of compound interest (credit cards) and basic loan literacy (how to calculate payments into the future), a rundown of the basic categories of investment (individual stocks/bonds, mutual funds, REITs, etc) and their relative risks, and an introduction to the concept of a balanced portfolio, and you’re most of the way there.

    Finally, to use the chef analogy, you tell them they’ve now learned to chop an onion, and that if they want to eat something cooked sous vide, they need to either go to chef school or go to a restaurant and pay a trained chef to do it for them.

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  46. Sarah Gayden Harris says:

    After I listened to this podcast it reminded me of the ‘fear’ experiments done by psychologist Howard Levanthal in the 1960s which I came across in Malcolm Gladwell The Tipping Point. I have downsized the text from Gladwell for a quicker read. I don’t normally respond to podcasts but I found Willis’s position cavalier, a bit frightening, and out of touch with how many people living in this country have never written a check and have never stepped into a bank and who year after year are taken advantage of by pop-up road side tax preparers and payday loan sharks.

    Levanthal wanted to see if he could persuade a group of Yale university seniors to get a tetanus shot. He divided them up into several groups and gave them a seven page booklet explaining the dangers of tetanus, the importance of inoculation, and the fact that the university was offering free tetanus shots at the campus health center to all students. Some of the students were given a ‘high fear’ booklet which included dramatic terms and color photographs of children having tetanus seizures, tetanus victims with urinary catheters ect….In the ‘low fear’ version the language was toned down & there were no pictures. Levanthal had hypothesized the college seniors who were exposed to the ‘high fear’ booklet would statistically be the shot receiver majority. HE WAS WRONG. When Levanthal gave a questionnaire to all the students, they demonstrated they were well educated on the dangers of tetanus & (like predicted) the ‘high fear’ group were statistically more convinced of the importance of the shots and more likely to say they would get inoculated. HOWEVER when Levanthal went back and checked to see who went to get a shot (one month later) all of those differences DISAPPEARED, One month after the experiments, almost none of the subjects (3%) had actually gone to the health center to get inoculated and their was no correlation btw high or low fear and that 3%. So the experiment didn’t stick, the message had no stickiness factor.

    Levanthal redid the experiment with ONE SMALL CHANGE which tipped the vaccination rate up to 28%, an equal number from both the high and low fear groups. He simply included a map of the campus, with the university health building circled and times that shots were available clearly listed. This is very interesting, the students were all seniors, they knew and had been to the health center before, they all knew and accepted the value of inoculation but fear and knowledge failed to statistically motivate them toward action. The students needed to know how tetanus fitted into there lives; the addition of the map and the times when the shots were available shifted the booklet from an abstract lesson in medical risk to a practical and personal piece of advice. Once the advice became practical and personal, it became memorable.

    As a nation while we are limited by funds allocated for education I wholeheartedly agree with Lusardi not Willis. We have to teach financial literacy to students, people must become financial advocates for themselves not passive receptors at the hands of professionals. Without financial literacy how will the internal alarm sound in the presence of those “professionals” who might do harm (knowingly or unknowingly). In the haunting words of Paul Starr who won the pulitzer prize for nonfiction in 1984 on the social transformations of American Medicine-(and I’m paraphrasing from memory) ‘the dream of reason did not take power into account…the dream was that reason in the form of the arts and sciences would eradicate all social ills….but reason is not an abstract force pushing inexorably up a hill but is defined by the narrower purposes and pursuits of men and women’. We must arm our children with knowing, and we must make this information more practical, less abstract and filled with meaning. I for one will never advocate a lack of knowledge or turning off thinking to acquiesce to another individual simply because they are a “professional”.

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