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Financial Literacy Education Under Attack: Man’s Search for Meaning

posted by Nathalie Martin

As a provider of financial literacy education, I read with great interest Professor Lauren Willis’ recent article Against Financial Literacy Education. It is a creative, must-read for anyone interested in the subject and adds greatly to the literature in this area.

Professor Willis is rightly concerned about financial literacy education being used as a proxy for meaningful reform. She also doubts whether it works, noting that credit industries support it but would clearly lose if it did work. She also claims that most financial products (she focuses on investments not credit) are now so complex that no one can help us understand them. We just need good advisors, she implicitly claims, not our own educational framework. I appreciate her work because it helps me know what to watch out for and compensate for. I reach different conclusions, however. I think financial literacy can work, if it is carefully designed to be meaningful. Otherwise it is worthless, I agree.

Meaningful consumer credit regulation would certainly be far better for society than financial literacy education, if we could only pick one, but we can have both. Plus, education, if it works, can be passed on from generation to generation and no one can take it away from us, whereas consumer protection laws (as we have seen) come and go like the wind.

Though it is an interesting point, I also can't see being against financial literacy education just because creditor interests favor it. What is that old middle-eastern saying, "the enemy of my enemy is my friend?" I don't care who funds it as long as the industry does not control the content. Whether they think it works or not, creditors support financial literacy education in hopes that it will be a placebo or proxy for law reform. That does not mean that it will be. It's up to us to make it meaningful, regardless of who funds it.

And as far as the complex products are concerned, I think the complexity makes a case for the education, not against it. How would one know a good advisor if one had no financial  foundation? Many financial experts are no angels and all have conflicts of interest. I’d like to at least try to teach people what to look for in an advisor and how to have some idea what they are supposed to do for us.

This brings me to Illinois once again and to another potential blow to financial literacy education. The paper presented by Professor Richard Wiener (Univ. of Nebraska), Limits of Enhanced Disclosure, suggests that giving consumers additional credit card disclosures does not reduce consumer spending and, in some instances, may make consumers spend even more. To reach this conclusion, study participants were shown written disclosures about the very high cost of credit (say the cost of paying over time with high interest rates, compared to the cost of paying with cash), but did not change their buying habits based upon these disclosures. Cognitive dissonance, the optimism bias, and other psychologically- protective measures kicked in very early in the thinking process. It was in essence too late. People were already sure those disclosures applied to others, not to them. There was no way a piece of paper (or a computer screen) was going to convince them otherwise.

This does not suggest that more personal and more long-term efforts can’t help people make choices that are better for them. Financial literacy education must be tailored to the audience and must take place over time. We are talking about reversing years of cultural consumerism and complex brain processes. Easy? No, but if we can put a man on the moon, we can surely devise a meaningful way to help people manage their financial lives by being much more cautious and aware of their money.

What works for one may not work for others. For example, I find feed the pig mascot to be a little creepy, coercive. He makes me want to rebel, but then again, I do not like being told what to do. On the other hand, the annual credit report commercials really speak to me.

So maybe scaring people with written disclosures, or doing things that make them angry or depressed, will not curb spending, but something will. The entire psychological fields of cognitive therapy and behavioral modification depend upon it. We can change our behavior by changing our thinking. This is a long-term process, not a magic bullet, but I believe we can decide what is most important to each of us, and purposefully pursue those things. My final post is about what works for me. What about you?


Along the lines of Nathalie's final post, I would point out that competently handing all of one's own financial affairs in a lightly regulated environment would require many hours, and more hours for those people for whom reading and arithmetic will never be easy or enjoyable.

What combination of up-front fees (including points), interest rate, loan length, and/or prepayment penalty should I seek when buying a mortgage? Should I buy long-term care insurance, at what price, with what guarantees about future coverage, under what assumptions about future health costs, and with what solvency prospects for the LTC firm?

These are not easy questions to answer, and for the non-expert, require many hours of education and information search to determine. Ordinary consumers are smart enough to understand that acquiring the literacy that would be needed to make these decisions well would be unlikely to be worth the effort, as compared to other things they could do with those hours. There are great advantages of specialization -- using attorneys rather than each teaching ourselves the law so as to represent ourselves pro se, for example.

Yes, as a society we can do anything to which we decide to devote sufficient will and resources -- we can put people on the moon -- but that does not mean we should teach every person to be his or her own financial advisor. Perhaps we should devote the short time we have on this earth to social, community, and political engagement, instead of the relentless focus on the financial self? This focus is both individualistic and materialistic, and ultimately one that blames lower-income consumers for their own poverty.

Moreover, financial literacy itself is not enough, yet financial literacy education is an excuse for doing nothing more. My brother lives on a small fixed income (supplemented now and again). He knows that if he overdraws his account by $1, he will have to pay an overdraft fee of $35. And he really does not want to pay (or ask me for) the $35.

But even keeping a little notebook with his withdrawals and debits written down (something that those of us on a law professor salary have the luxury of not having to do -- I have yet to find a law professor who keeps to a budget to the penny, and most keep to no budget at all) does not consistently prevent him from incurring overdraft fees. Last month, for example, although he tried to keep track of his spending, he forgot to write one entry down, misremembered an expense, or transposed two digits when he wrote one entry, and he overdrew by about $7.

Teaching my brother more about overdraft fees, math, and budgeting will not help him, and is frankly insulting to his intelligence. We should force banks to change debit/ATM cards so as not to allow overdrafts (or at least default to no overdrafts, and require consumers to opt out to get a credit card feature and overdrafting added). But as long as overdraft fees are wildly lucrative, banks will continue to say with a straight face that financial literacy education will be enough for people like my brother, and Congress will not force them to change.

I do not see how meaningful financial education could possibly come out of academia seeing as how our whole American system of higher education is dependent upon inducing large numbers of young borrowers to enter into loans that they cannot reasonably expect to repay, which because of our current bankruptcy laws will follow them to the grave.

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