Money To Live

September 22, 2008

Teaching Financial Literacy

Filed under: education — by moneytolive @ 5:00 am
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In general, I am a big supporter of financial literacy programs, but some new research has me questioning the usefulness of financial literacy. Lauren Willis contrasts financial planners with doctors and lawyers. While you can buy thousands of books that claim to tell you how to manage your finances, there are not nearly as many telling you how to become your own doctor or lawyer. In a paper, Against Financial Literacy Education, she says

For some consumers, financial education appears to increase confidence without improving ability, leading to worse decisions.

Ouch.

This reminds me of a conversation a friend recounted to me in college. My friend was a math major and was talking to a humanities student, who had taken a special humanities-math class the previous semester. When the math major told the humanities student that she was taking topology, the humanities student said, “You spend a whole semester on topology? We finished it in two weeks!”

In the humanities-math class, the high point of the topology unit was tying one’s feet together with a rope and turning one’s pants inside out without removing the rope. (If you are familiar with advanced math, you know that topology involves much much more than turning your pants inside out.)

Willis’s article about financial literacy reminds me of the humanities-math class because in each case, the students were learning a little bit, but importantly, they were not learning what-they-were-not-learning (Rumsfeld might say there are “unknowns unknowns,” but the students may not even know the existence of “unknown unknowns”) .

A criticism of financial literacy education is that the information can be outdated. As new types of loans (i.e., subprime) come onto the market, consumers need to be re-educated about their options. A different approach to financial education is to teach people to evaluate financial products so they are comfortable asking questions and getting information from multiple sources before making a decision. Really, this would be more like “general critical analysis” training.

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1 Comment »

  1. I feel this “general critical analysis” training is one of the most important types of education we need to focus on. Not only for financial literacy, but science literacy, and even political literacy. Everyone needs to hone in on their “bullshit detector” skills as I like to call it. If people can look at options critically and not take anyone’s word for it that a particular option is in their own best interest, they will be more likely to make better decisions in their own personal life (from picking the best breakfast cereal to picking a mutual fund), in their support of policy, in their vote, etc. Hurray for education!

    Comment by Shannon — September 25, 2008 @ 11:34 am |Reply


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