| BRUSSELS 2007! Workshop 3: "Banks at School – Can Consumers be Educated?" - ABSTRACT from Lauren Willis |
W3, BANKS AT SCHOOL—CAN CONSUMERS BE EDUCATED?
Abstract by Lauren E. Willis, Associate Professor of Law, Loyola Law School Los Angeles, USA
AGAINST CONSUMER FINANCIAL EDUCATION
Quote from NAACP Financial Empowerment Guide:
“Financial literacy provides the foundation to build wealth and fully participate in the economy. By understanding basic financial principles and putting them to use, you can be on the road to improving the lives of your household and your community….”
Quote by U.S. President George W. Bush, when asked about the high home mortgage foreclosure rates of 2007:
“[T]here needs to be financial education measures in place.”
Consumer financial education is frequently invoked as a public policy tool for the 21st Century. Education is believed to turn consumers into “financial citizens” willing and able to make financial decisions and engage in financial behaviors that increase their own welfare.
But what empirical evidence supports this belief? Given what we know about the financial marketplace, consumer resources, and psychology, how plausible is the belief? What are the costs of using personal finance education as a policy tool, and are these costs commensurate with the benefits it could reasonably be expected to provide? Do we have any alternative but to pursue financial literacy?
A careful examination of the research in this area demonstrates that the belief in the effectiveness of consumer financial education lacks empirical support. Self-reported survey data, low nonrandom response rates, uncontrolled confounds, self-selection effects, and statistically insignificant results undermine existing studies claiming to find that literacy programs improve consumer financial decisions.
Moreover, the belief that consumer education could be an effective policy tool is implausible. First, the financial services marketplace moves with such velocity that lessons taught today will often be inapplicable–or even affirmatively misleading–tomorrow. Industry is always one step ahead of regulators and educators, and by the time the knowledge of regulators and educators filters to consumers through education, the market will have further changed.
Second, the gap between the arithmetic skills, financial knowledge, document comprehension, and facility with probabilities of the vast majority of U.S. consumers and those needed for good, welfare-enhancing decisions in today’s financial market is too wide to breach.
Third, while high financial literacy is often necessary for good decisionmaking about credit, insurance, and retirement saving and investments, this literacy is not sufficient, because improved financial behavior will not necessarily follow. Heuristics, biases, and emotional coping mechanisms that ubiquitously interfere with good decisionmaking in personal finance domains are unlikely to be eradicated through education efforts, particularly in a dynamic market. The conditions that have been found at least somewhat successful for debiasing are not present in financial decisionmaking.
Fourth, financial firms with their massive marketing budgets will always have the upper hand in reaching consumers at “teachable” moments, the same moments when consumers are at their most vulnerable. Moreover, convincing a consumer to buy good and services, even financial products, does not require her to understand them, and is therefore a far simpler task than educating her to make welfare-enhancing financial decisions herself.
Harboring a belief in consumer financial education is for the most part innocent, but it is not harmless; our pursuit of financial literacy poses costs that almost certainly swamp any benefits. First, several studies have shown that financial education can have paradoxical effects on consumer literacy and behavior. For example, high school students who take a course in personal finance in the U.S. consistently perform below average on a nationwide survey of students’ financial literacy. Although students who play the Money Game, a financial education tool in the form of an interactive game, perform slightly better than average on the financial literacy test, they also report having worse financial habits, in that they are less likely to save money than students who do not play the game. In a study of adults who had declared bankruptcy, while those who received a financial education course rated it highly, they were less likely to make payments according to their bankruptcy plans than debtors who had not received the education.
Second, financial literacy as a policy tool blames the consumer for her own plight. A widely held cultural belief in the U.S. views personal finance decisions not merely as expressions of preferences but as signifying moral character traits such as responsibility, trustworthiness, self-control, and wisdom. Now that financial products are so complex and fluid that few can understand them well, consumer financial education is a necessary detour on the path to moral blameworthiness—perhaps the consumer cannot be blamed for choosing a losing investment strategy directly, but she can be blamed for failure to educate herself to be sufficiently expert to know just how to handle her retirement savings.
Third, the time and expense that would be necessary to improve consumer financial literacy—if this is possible at all—are enormous. The policy model engendered by the financial education model presents a classic inefficient division of labor. Rather than having a few people become financial experts and then provide the services of their expertise to all, the consumer education model posits that each consumer must educate herself, and must continually do so to stay abreast of the market, so that she can make financial decisions unaided. We do not expect—or even want—all people to become their own doctors and lawyers—and it is a foolish waste of human capital to make them all become certified financial planners.
Finally, the opportunity costs of reliance on financial education cannot be overlooked. When you have education, the financial plight of each consumer and even of whole communities looks like the result of their own poor, uneducated decisions. Of course, financial problems are largely the product of insufficient income and assets, and lower health insurance costs or a higher wage would do a good bit more to change that than personal finance education ever will. Our single-minded focus on financial literacy distracts us from developing and implementing alternative policy approaches that have real potential to improve the well-being of consumers.
Our fantasy of consumer financial education as the cure to individual and community financial ills needs to end, so that we can begin work on finding and implementing better policy tools. |
| ID: |
40127 |
| Author(s): |
iff |
| Publication date: |
13/09/07 |
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Created: 03/09/07. Last changed: 03/09/07.
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