The Problem(s) with Financial ‘Literacy’

April is, of course, National Financial Literacy Month—and for as long as I can remember, the retirement industry has been talking about the need for some kind of personal finance education in public schools—there’s just one problem.

First off, there actually are such programs already in existence at the moment. Half the country (25 states) now requires high school students to take a course in economics, and 21 states now require high school students to take a course in personal finance. Granted, they may still be too well dispersed to show up on your normal “radar”—but they’re growing in number and dispersion. 

Those efforts[i] notwithstanding—and while there’s some anecdotal evidence that this has helped (some) with regard to better decisions with regard to college financing—I’ve little sense that it’s moved the needle much with regard to participant knowledge or financial decision making (feel free to disagree in the comments below, if you’ve had a different experience—or if you haven’t).

In fact, a 2014 paper by from three professors reviewed 168 different papers[ii] covering some 200 studies on the topic of financial literacy and financial education—and found that what they termed “interventions to improve financial literacy” accounted for “only about 0.1 percent of the variance in the financial behaviors studied.” 

Or said another way, “not much.” 

A more recent paper titled “High School Curriculum and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses” echoes those findings, concluding, “there is little evidence that education intended to improve financial decision-making is successful.” These authors pose the question “Can good financial behavior be taught in high school?”, only to conclude that, “It can, though not via traditional personal finance courses, which we find have no effect on financial outcomes.”

While the findings in those two studies have some limitations—not the least of which is their determination of the outcomes measured, and the aggregation of a wide variety of scholarly work (and assumptions) - as someone who has long been one of those voices advocating for greater financial literacy—this has been a bit of an eye-opener. With this broadening exposure to personal finance in school, why aren’t[iii] these programs—why isn’t financial literacy—taking root in a meaningful way?

Turns out there might actually be a reason.

The researchers who had examined those 200+ studies did offer a perspective: “like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention,” they write.

In fairness, there are a number of classes I took in high school (and college) that I quickly dismissed as soon as the final exam was concluded—because I didn’t much like the subject (or the teacher), but often because I just didn’t get the point (beyond passing the exam, and ensuring that I would never again have to consider the subject—particularly among the classes I was required to take. Might that be the case with these personal finance offerings? It seems reasonable. 

So, what can we do? 

Well, considering that the time gap between that high school personal finance class (if there is one, and I’m not sensing any movement to require such things on college campuses) and employment is frequently longer than 20 months, it’s little wonder that the needle hasn’t moved much, certainly not as much as one who is trying to engage with these individuals in financial planning might wish. Rather, as the researchers note, “There must be some immediate opportunity to enact and put to use knowledge or it will decay. Moreover, without a ready expected use in the near future, motivation to learn and to elaborate may suffer.” 

Said another way, you have to “use it or lose it.”

The paper offers some possible remedies. Specifically, they suggest that future education might be more productively focused on teaching “soft skills like propensity to plan, confidence to be proactive, and willingness to take investment risks more than content knowledge about compound interest, bonds, etc.” They note that in their meta-analysis, “measured knowledge of financial facts had a weak relation to financial behavior….” Which, I have to say, seems to validate my sense of the inadequacy of current financial “literacy” measures. 

They also suggest that content knowledge “may be better conveyed via ‘just-in-time’ financial education tied to a particular decision, enhancing perceived relevance and minimizing forgetting.” They acknowledge that it “may be difficult to retrieve and apply knowledge from education to later personal decisions… particularly decisions coming years after the education.” The authors of the second paper cited suggest additional mathematics training, which they found “leads to greater financial market participation, investment income, and better credit management, including fewer foreclosures.”

All of this seems to suggest that our industry needs to quit holding out as some panacea the notion that financial education programs in school will “solve” the 401(k) education problem.[iv] However, that doesn’t mean we should abandon those efforts, certainly not in core areas like budgeting, debt management and saving. 

The “problem” with financial literacy may well be that many still lack that exposure—but more significantly that even for those who get that exposure, there’s been little opportunity for applying that personal finance knowledge in high school and college, though arguably it shouldn’t be.

In sum, true financial “literacy” is perhaps not so much whether you can talk the talk—but being given both the knowledge—and the opportunity - to walk that walk.

- Nevin E. Adams, JD

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[i] Another problem in evaluating the impact is defining what constitutes “financial literacy” in the first place. Noted academics have boiled that complicated concept down to three fairly fundamental questions—though personally I don’t see how knowing the answers to those particular questions would help anybody make a financial decision in the real world, much less a decision about saving or investing in a 401(k) plan. Which brings to mind questions not only what the personal finance curriculum covers, but what kind of contribution it is making to financial “literacy.”

[ii] The reference list alone runs 26 pages! And there are more to go with the multiple appendices.

[iii] At this point, I’ll align my opinion with that of the authors of the second paper: “Our findings do not necessarily imply that financial literacy does not matter, or that financial education is never effective.”

[iv] Not that it wouldn’t help to slip in some basic understandings of the markets and investing alongside those math problems about two trains heading toward each other at variable speeds.