Knowing more about finance does not lead to better financial decisions.
In fact, some of the most supposedly financially knowledgeable people -- mutual-fund managers -- don't make better financial decisions than other people, according to a new study by Michigan State and Notre Dame researchers, as reported in The Atlantic.
It's the latest evidence that a years-long campaign to help normal Americans achieve "financial literacy" is ineffective at best and misguided at worst. As The Atlantic notes, expert stock-pickers in finance and forecasters in other fields have been derided for decades as no better than dart-throwing monkeys.
When it comes to getting ordinary people to know more about finance, however, the consensus has been that this time it’s different. On the surface, it’s a well-intentioned and uncontroversial mission: Helping people help themselves by making better decisions. And there's plenty of evidence that people have a scary lack of financial knowledge: One study found that just a third of Americans would correctly answer three simple financial questions.
And those questions are models of transparency compared with the opaque language consumers often face when making even the simplest financial decisions. The goal of making people financially literate seems to imply that it's the individual’s responsibility to safely navigate what is often intentionally inscrutable financial language.
The same companies who create the problem of financial products Americans can’t understand push financial literacy as the solution. For instance, Bank of America thinks the key is an online course. The financial industry’s self-regulatory organization has an entire foundation devoted to investor education.
But financial literacy in this gauzy, generalized form simply doesn’t work. The Cleveland Fed found no “conclusive support that any benefit at all exists” from financial education as it is currently taught. Shocking no one who has been to high school, one study showed that taking a financial literacy class in high school does nothing to improve financial literacy.
And a study by researchers at the Brookings Institution could not find “strong evidence that financial literacy efforts have had positive and substantial impacts."
In a 2011 presentation titled “The Financial Education Fallacy,” Lauren Willis, a professor at Loyola Law School, shot down the idea that “ordinary consumers would have made better mortgage choices and would have accumulated sufficient precautionary savings to weather the recession" if they'd just been financially educated. Straightforward consumer protections, like putting limits on how many single stocks people can own in retirement accounts, are most effective. Financial education is no substitute for financial regulation, she argues.
There is evidence that giving people specific information about a specific product (say, about credit card debt for people who are interested in applying for a credit card)works better. It’s not easy, given the mountain of details involved. But single-serving consumer information is likely to be far more helpful than vague goals of getting Americans to solve their own financial problems by thinking them through.
Personal finance author Helaine Olen has called financial literacy “both a failure and a sham.” This conclusion deserves to be widely accepted.
When mutual-fund managers are making dumb decisions, it’s time to admit that making average Americans generally more financially literate is not a useful goal. Starting with clear-cut consumer protections and unbiased information about specific financial products is far more helpful.