The concept of financial literacy and its importance as a life skill has been around for a long time. Early American president John Adams wrote, "All the perplexities, confusion, and distress in America arise not from defects in their Constitution or Confederation, nor from want or honor or virtue, so much as the downright ignorance of the nature of coin, credit, and circulation.” In 1849, Victorian bank manager James Gilbart promoted financial education as a way to help potential customers of his London & County Bank feel comfortable by knowing what to expect when opening an account. In the US, the Smith-Lever Act of 1914 established the funding that land grant colleges still use to teach cooperative extension courses in personal finance.
Congress, along with nonprofit community organizations, continued to support these educational efforts over the decades and in 2003 established the Financial Literacy and Education Commission, which subsequently released a national strategy for financial education. Thanks to Congress, since 2004 Americans have celebrated April as National Financial Literacy Awareness Month. And President George W. Bush signed an order in January 2008 that created an advisory council on financial literacy.
Yet in spite of legislators’ concern over Americans’ lack of financial literacy, only 17 states require high school students to take a personal finance course. Many authors have pointed out that such educational efforts, although admirable, can also be seen as as a form of caveat emptor, placing sole responsibility for reducing financial stress on the individual rather than introducing more regulation of the financial services industry—an industry which regularly offers new and increasingly complex financial products.
The subprime mortgage crisis from 2007 to 2010 increased pressure to protect the public from predatory financial practices, and in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. This act created the Consumer Financial Protection Bureau (CFPB). The CFPB provides tools and resources directly to consumers to help them make better informed decisions, and supports research on effective methods of financial education.
But Is Financial Education Effective?
It certainly doesn’t look that way once we analyze the body of research to date. Multiple academic studies have shown that claims of a cause and effect relationship between financial education and improved financial behaviors have very little evidence to support them. When examined by a team of researchers conducting a meta-analysis of 90 previous studies, the correlations between financial education and improved financial behaviors were more strongly associated with individual difference or personality factors that were not measured in the prior studies, such as familiarity with numerical concepts, financial confidence, and willingness to take risks. In Parts II and III of this series, I’ll explain why education alone fails to change people’s behavior outside the classroom.
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