Why Financial Education Doesn’t Work—Part 4: What Does Change Behavior



Several organizations have been conducting research to explore exactly what does work to change people’s financial behaviors. At Duke University, psychology and behavioral economics professor Dan Ariely runs the Common Cents Lab, which is based in the Center for Advanced Hindsight. In an initial study of 1,000 low-to moderate-income Americans, researchers there found that most people want a sense of financial security yet have the feeling that it’s an elusive goal. While the study participants were typically able to list four specific actions they could take to improve their financial situation, most had not yet done so, a textbook example of the Intention/Action Gap. First identified by social scientists, the Intention/Action Gap occurs when people have a major goal and know what to do to reach this goal, but don’t take the steps they know they could to achieve it.


Funded by the MetLife Foundation, the Common Cents Lab is studying specifically how to help people bridge the Intention/Action gap in the areas of saving for emergencies and for retirement, improving credit scores and reducing debt, and improving cash flow management. Their process for promoting behavior change focuses on three steps: identifying the key behavior, removing barriers, and increasing benefits. It begins by observing people engaged in the process or environment where the behavior happens. Each step of the process is documented through observation, interviews, and surveys to better understand what the person experiences and what is driving the key behavior. The next steps are to define the metric for measuring progress on the behavior, identify and remove or reduce the barrier that is causing the most friction, and then add or amplify the most likely benefit that could motivate behavior change.

In the UK, the Behavioural Insights Team (BIT) is the world’s first government institution dedicated to the application of behavioral sciences. A public-private partnership, its work focuses on making public services more cost-effective and easier for citizens to use, improving outcomes by incorporating a more realistic model of human behavior into policy; and wherever possible enabling people to make better choices for themselves through the use of ‘choice architecture’. This is a concept pioneered by Richard Thaler, who is one of the company’s advisors. Created in 2010, the company has published a framework for applying behavioral principles. It’s based on the idea that if you want to encourage a behavior, make it easy, attractive, social, and timely— EAST. The framework is based on the company’s own research combined with insights from the wider academic literature.


BIT takes a very empirical approach, and rigorously tests its interventions through a series of randomized controlled trials before scaling them up. One example is increasing tax revenues through changing the wording of letters sent to taxpayers from the Inland Revenue, the UK equivalent to the IRS. Simply adding a true statement that ‘most people pay their tax on time’ turned out to increased compliance from 33.6% to 35.1%. Adding another statement that ‘most people in your area have paid their tax and you are one of the few that are yet to pay’ increased compliance to 39%, bringing in millions of pounds of unpaid taxes at almost zero cost. Interestingly, it also reduced the number of complaints.

The difference that personal financial coaching makes

At the same time, a number of nonprofit organizations in the US are applying these concepts to new programs that employ financial coaching as a way of empowering people to make decisions and take actions to increase their financial well-being. Coaching in general is based on Prochaska’s well-known model of health behavior change, which has been widely used to successfully reduce addictive behaviors such as tobacco use, and applies this model to other life areas. Coaching employs techniques that are consistent with the concepts and principles of effective behavioral change. A relatively new entrant to the coaching field, financial coaching differs from traditional financial advising in that it tends to focus more on allowing client-centered goals to guide the process, rather than only providing specific expert advice or recommendations.

Typically, coaching involves interventions such as motivational interviewing that work collaboratively with an individual to identify behavioral outcomes, set goals, brainstorm strategies, create concrete action plans, identify strengths, build motivation, and provide accountability. However, because financial coaching is a highly personalized process that meets people ’where they are’, there may be times when specific advice or counseling are appropriate, given an individual’s circumstances. The coaching model is also congruent with the concept of financial wellness as a holistic approach to personal finance, one that views money as a tool for living life in accordance with a person’s values.

While financial coaching is a relatively new field, research is showing promising evidence. Several evaluations of the effectiveness of financial coaching in changing financial behaviors have now been published. Although still in its early stages, coaching is showing positive outcomes.

A 2012 randomized controlled trial by the Urban Institute examined data from three financial coaching programs and found positive associations between coaching and behavioral outcomes including goal formation, confidence, budgeting, and saving. In two separate studies, Moulton et al. first explored enrollment in a financial coaching program among low- to moderate-income recent homebuyers and in the initial study found that overconfidence in financial matters reduced program enrollment. In the follow-up study, researchers tested the effects of combining financial coaching with an online financial planning module that included goal setting exercises. First-time homebuyers who completed the planning module and received quarterly contacts from a coach were less likely to become delinquent or default on their mortgages.

In 2013, NeighborWorks America and the Citi Foundation partnered on the Financial Capability Demonstration Project, which involved 30 financial coaching programs, and assessed the effectiveness of financial coaching offered by participating community-based organizations. The project began by developing training for the coaching practitioners, and then evaluated the results of the coaching. More than one-half of clients who reported no savings at the start of services reported some savings after participating in coaching. The result was a median savings increase of $668. Clients also saw an average increase in their FICO scores of 59 points, with clients who participated longer being more likely to see increases in their credit scores. Almost two-thirds of clients who reported feeling stressed about their financial situations when they began coaching no longer felt that way after participating in coaching and related programs offered through the project.


Courtesy of the The Financial Clinic

In the most rigorous evaluation of financial coaching to date, the Urban Institute recently released a report funded by the Consumer Financial Protection Bureau evaluating coaching outcomes at two community-based nonprofit organizations, The Financial Clinic in New York City and Branches of Miami, Florida. 36 Clients were randomly assigned into treatment and control groups, so a cause and effect relationship between coaching and outcomes could be demonstrated. Client populations varied between the two organizations, so outcomes also varied somewhat between each site. At the Financial Clinic, the treatment group accumulated $1,200 in savings, roughly two times that of the control group, and reduced average debt in collections by about two-thirds compared to the control group. At Branches, total debt among the treatment group declined by $10,650, roughly 20% lower than the control group. The study also showed statistically significant improvements in credit scores: Financial Clinic clients offered coaching saw their average credit score increase by 21 points. The report describes other positive findings related to improving participants’ financial behavior and reducing stress levels.

As research into what makes financial education effective continues, the CFPB published a 2017 report identifying five principles of financial education that make the biggest difference between success and failure. The five factors, summarized below, sound a lot like coaching:

  • Principle 1: Tailor information to the specific circumstances, challenges, goals, and situational factors of the individuals served. Avoid a one-size-fits-all approach.

  • Principle 2: Provide just-in-time-information that is relevant and actionable to a specific situation or goal, so that information and skills are more likely to be retained.

  • Principle 3: Build generalizable skills, such as knowing where to find reliable information to make decisions and how to process information.

  • Principle 4: Build on motivation by supporting people to focus on their own values and standards, to persevere in the face of challenges, and to build confidence that they can achieve their financial goals.

  • Principle 5: Help create habits and systems so that it’s easy to follow through on decisions.

These principles are very similar to many of the ideas espoused by the behavioral economists cited previously that can help avoid cognitive biases. Principle 5 is also congruent with the concept of choice architecture. Maybe coaching is the best way to deliver personalized and effective financial education that can actually change financial behaviors and improve outcomes. The research certainly supports that idea.

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