The meta-analysis by Fernandes and colleagues points out that previous research evaluating the effectiveness of financial education often conflates two different kinds of studies: those that measure the degree to which a person is already financially literate, and those that measure whether and to what extent an educational intervention has increased a person’s financial knowledge. But neither pre-existing financial literacy nor educational interventions have been demonstrated to improve actual financial behaviors. Financial education explained only one tenth of one percent (.001) of downstream financial behaviors in the 90 studies that were aggregated, and the authors note that financial literacy is highly correlated with other individual differences or personality traits, such as self-efficacy, that can explain positive financial behaviors and outcomes. As in so many other areas of life, just because we know we should do something doesn’t mean we actually follow through and do it.
One of the problems with financial education is that it can become obsolete in a relatively short span of time. New financial products are engineered and introduced more quickly than organizations offering financial education can keep up with them. The last 30 years have seen a fivefold increase in bankruptcies along with the rise of payday loans, reverse mortgages, collateralized debt, and credit card fees and interest rates. Old rules of thumb, such as saving 10% of one’s salary for retirement, are no longer sufficient in a changing economic environment where pensions are rare and defined contribution plans are the new norm.
In fact, the creators of the 401(k), the most prevalent vehicle for retirement savings, have publicly expressed regret at the extent to which these plans now dominate, saying that they did not anticipate that it would replace pensions and that it was not designed to be the primary tool. “ ‘The great lie is that the 401(k) was capable of replacing the old system of pensions’, says former American Society of Pension Actuaries head Gerald Facciani, who helped turn back a 1986 Reagan administration push to kill the 401(k). ‘It was oversold.’ ” The average employee is now responsible for figuring out how much to save, where to invest it, and how to make it last through a longer retirement lifespan. As Loyola Law School professor Lauren Willis points out: “We don’t expect people to be their own doctors or lawyers; why would we expect them to be their own financial advisors?”
Financial education also appears to suffer from a ‘use it or lose it’ problem. The Fernandes study found that within 20 months almost everyone who has taken a financial literacy class has forgotten most of what they learned. And in a 2013 working paper, Shawn Cole at Harvard Business School, Anna Paulson at the Federal Reserve Bank of Chicago, and Gauri Kartini Shastry at Wellesley College discovered that high school personal finance classes didn’t make any difference when it comes to how we handle our finances. Instead, increased exposure to mathematics courses was associated with and explained positive financial behaviors. And according to the CFPB, “There's no clear link between taking personal finance classes and saving more, paying off debts or raising your credit score.”
Other studies on the effectiveness of financial education have relied on participants’ self-report of their financial behaviors, which is problematic because it introduces potential sources of measurement error into the results. In research, self-reported behavior is susceptible to both social desirability and recall biases. Participants in those studies may have wanted to appear to have made more responsible choices than they actually did to ‘look good’ to the researchers, or they simply may not have remembered accurately what they really did. So, these studies are likely to overestimate any true effect of the education intervention studied. And of course educational interventions can vary a great deal in content, length, and delivery format, which also introduces a large amount of variability and potential measurement error.
Even Economists Don’t Recommend It!
A one-time financial education effort seems unlikely to actually change habitual long term decisions and behaviors, according to well-known economist Annamaria Lusardi of The George Washington University School of Business. And education that takes a ‘one-size-fits-all’ approach may fail to reach groups with more specialized needs. For example, she notes that women typically score lower on measures of financial literacy. Multiple studies report that in spite of wage equality efforts over the last 50 years, women still typically earn less than men for the same work, and spend more time out of the workforce performing unpaid care work. These systemic disadvantages, together with a longer lifespan, result in a woman needing to save 18% of her income just to have the same amount of retirement savings as a man working at the same job who saves only 10%. Yet, only 31% of women surveyed by Lusardi had made any attempt at planning for retirement. She concludes that “Both employers and governments have devoted efforts to seminars, educational programs, and retirement planning products in the last decade, but such efforts have had only a very mixed effect on saving patterns. One-size-fits-all programs are unlikely to successfully address saving shortfalls among many different groups.”
Lusardi is not the only economist to throw cold water on the idea that financial education and financial literacy can improve financial behaviors and outcomes for most people. In an interview published in The Economist, behavioral economist Richard Thaler stated: “‘The depressing truth is that financial literacy is impossible, at least for many of the big financial decisions all of us have to take.’ Aptly for someone who has built his career on the study of irrational financial behaviour, Mr. Thaler admits that even he finds it hard to know the right thing to do. ‘If these things are perplexing to people with PhDs in economics, financial literacy is not the right road to go down.’” Thaler was awarded a Nobel Prize in 2017 for his work, and is the co-author of the 2008 book Nudge: Improving Decisions about Health, Wealth, and Happiness.
When you combine these critiques of the existing research with what we’ve learned during the past 50 years about behavioral economics, the surprising inadequacy of financial education to change behavior starts to make sense. Despite its shortcomings, however, financial education seems unlikely to go away, and research continues to focus on how it can be made more effective. As NPR journalist Gabrielle Emanuel points out, the failure of financial education in changing behavior doesn't mean we should stop teaching people about managing their money. It just means we need to do it better. And in Part III of this series, I’ll provide a good place to start—understanding the role of behavioral economics.
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