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Getting Schooled

Dennis Friedman  |  November 5, 2019

MANY BELIEVE we’ve raised a bunch of financial illiterates. If people were better educated about personal finance, the argument goes, they’d make smarter money decisions.

North Carolina this year became the 20th state to require high schoolers to take a financial literacy class. Its Lieutenant Governor, Dan Forest, said the new law would “ensure future students, prior to graduating high school, will be more financially literate and economically sound in their decision making as adults.”

But many aren’t sold on the idea that a personal finance class in high school is going to make much of a difference. According to the Huffington Post, “The way we make financial decisions has more to do with our money personality, our math skills, logical thinking, the ability to investigate, the confidence to ask questions and spot BS answers, and recognizing the unconscious influences in ourselves that have long been studied by behavioral scientists.”

There are many studies that show that teaching financial literacy in high school has little effect on how people handle money. For example, a 2014 paper for the journal Management Science looked at the results from nearly 170 papers covering more than 200 scientific studies on financial literacy. It found that financial education did little to improve subsequent financial behavior.

According to Timothy Ogden, managing director of the Financial Access Initiative, a research center, “It’s easy to boost financial knowledge: Lots of programs show positive outcomes when you ask people a few questions before and after a financial-ed course. Unfortunately, the impact disappears when you measure what people who take the courses actually do (not just what they say they do, which is a problem with a lot of studies that claim to find an impact).”

What these studies may be telling us is that we need to change the way we teach financial literacy. Financial education can have more of an impact if it’s based on the students’ short-term needs and delivered in a timely manner. For example, teaching high schoolers about college loans and credit card debt could make a difference in the debt load of students going to college.

Personal finance classes also need to deal with economic realities. How to find the lowest interest rate on a car loan is more important than how to calculate interest on that loan.

We should keep in mind that just because you know more about personal finance doesn’t mean you’re going to behave better. We all have emotions and biases that can keep us from making rational decisions.

What would have a greater impact than a financial literacy class? How about also improving consumer protection laws, so the public is less likely to get ripped off? Such laws could guard against financial institutions who design products that are misleading and use deceptive sales techniques to market them.

Our current consumer protection laws result in lengthy disclosures that are often attached to the financial transactions we sign as consumers. But who reads that mountain of paperwork? Disclosure alone isn’t enough. Some suggest we should also improve the default options embedded in financial transactions. That would force financial institutions to think more carefully about the products they sell.

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. His previous articles include Battling TimeDon’t Want to Know and Are We There Yet? Follow Dennis on Twitter @DMFrie.

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