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Getting Schooled

Dennis Friedman

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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Mik Barbasol
Mik Barbasol
1 year ago

I suspect that failed ideology socialism and victimization is being taught and promoted in our schools …the current democrat presidential candidates are the end result…but it’s different this time right ?

Roboticus Aquarius
Roboticus Aquarius
1 year ago
Reply to  Mik Barbasol

It might be a good exercise to spend a month understanding why this is, rather than bringing political bias into an investing discussion.

Mik Barbasol
Mik Barbasol
1 year ago

I’m listening if you have another “understanding“ to share?

Phil M
Phil M
1 year ago

I always thought of financial classes in high school to be not so much about changing behavior, but about teaching math that is actually relevant to most people’s lives. I think the study investigated the wrong thing – sure, one class did not change lifelong behaviors of people and make them financially responsible. That’s a lot to ask.

Instead, I think these classes were made to address a common joke: “I don’t know how to do my taxes, calculate interest on a car loan, or determine if I should rent or buy, but damn I know how to solve the Pythagorean theorem!” High school can at least teach people the math skills they will use every day – they can’t stop them from choosing to buy an expensive car. But at least they will know how much they are screwing themselves when they sign the contract!

Roboticus Aquarius
Roboticus Aquarius
1 year ago

Several studies suggest that financial literacy classes are largely a waste of time. Like many things in life, that kind of capability is there for the taking, but you have to want it.

Glenn neal
Glenn neal
1 year ago

So, we just give up on the idea of financial classes because people don’t apply what they learned? That few people apply anything they learn in school doesn’t mean it’s not worth teaching. When was the last time any of us used the Pythagorean Theorem? Still, it’s there when we need it.

“How to find the lowest interest rate on a car loan is more important than how to calculate interest on that loan.” No, it’s not. If you know how to calculate interest on a car loan then you understand how compounding works to your disadvantage when you borrow. You may decide to save up for your car first and pay cash, or buy a less expensive car. Financial education doesn’t end with learning a few calculations, it’s about applying what you’ve learned over time and using critical thinking skills. Few will, but they should not be deprived of the opportunity just because most don’t.

Jim Wasserman
Jim Wasserman
1 year ago

PS. Check out my article “Weighty Decisions.” on HD. It’s taken from a lesson I do on Financial Literacy.

PPS If you go because of this post, that’s a “nudge” as they say in Behavioral economics, and it is a BIG part of FL: learning how to recognize how nudges shape our supposedly “independent” decisions in matters, including finance!

Be Well

Jim Wasserman
Jim Wasserman
1 year ago

Interesting piece, Dennis. As someone who has taught financial and media literacy for over twenty years, and who writes books on it, there is SO much to say, so I’ll just try to hit some high points.

1. How do you/we define “financial literacy” or FL curriculum? Virtually no state sets standards for this, either in terms of knowledge or skills. I’ve seen courses that are basically home ec (not that there isn’t anything bad about teaching home ec!) to advanced (AP) and theoretical economics taught under this label. A FL course might need to cover a Veblen curve, but there is no need to cover a Laffer curve.

2. How do you/we measure outcomes? Since wide-ranging financial literacy courses are relatively new, how are we measuring their impact and how far down the line are we? Are we measuring it by knowledge or skills? Are we measuring application or retention?

3. How is FL “failure rate” compared to other course subjects? Should we stop teaching geography or history given horrible adult scores in these areas? How about stopping health given poor American choices the rest of their lives as statistics show? As you state, the usual response is that we need to teach these subjects BETTER, not drop them.

Now, a couple of ways I would suggest improving FL education:

– Make it a revisited subject at least every two years. Most schools that teach FL teach it ONCE, usually during high school, and often by having a math teacher “plug it in” to their curriculum. Few subject matter/skills courses stick when taught once by a teacher forced to do it and check the box “done.”.

– There must be more societal reinforcement. A child is not a future participant in financial decisions. Their spending behaviors are shaped from birth, built by societal messaging that says SPEND, don’t save. If we think one course will counter all that, well, go see ow well abstinence education works. How many parents know what is covered in their child’s FL education, and what are the parents doing to reinforce it (let alone counter the message). As you say, there also needs to be regulation and consumer protection, not just a caveat emptor hands-off attitude of government.

– Make it relevant. As you said, have kids look at models/do exercises about things relevant to them, from elementary cost benefit of spending on cookies or juice to teens taking a job or using the time to study (time is a resource and part of FL). The heart of FL is dealing with trade-offs (Spend or save, on X or Y). Many courses have kids look at mortgages and loans, but this is foreign and removed from kids (and a decreasing reality for future generations who are more likely to rent). Instead of a household budget (do they really understand utilities?), take them to a store and have them plan a party with a hypothetical $50 budget,

There is so much more, but what we need is a concerted, organized way to address Financial Literacy, not call anything that says “save” FL and then wipe our hands and say “done.” And we might want to actually ask the teachers how to do it.

Be well.

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