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Americans are Innumerate and Broke

posted by Nathalie Martin

And not just the ones I tell stories about from my clinical law teaching.  Some of our readers have written in to say that these clients of ours, these title loan and payday loan customers, are idiots or worse yet, should be institutionalized for their stupidity. Most of my stories about our clients have to do with not being able to do complex math.

Now we learn that most consumers think that 36 months is longer than three years.  And these are “regular” Americans, not those dullards who use sub-prime credit.  A study in the Journal of Consumer Research proved that as a result of something called the “unit effect,” no doubt a behavioral bias similar to framing, “people typically fail to realize that the unit of quantitative information is arbitrary.”

As one cool math blog reports, this “unit effect” leads to anomalous conclusions: to most consumers, the difference between an 84-month warranty and a 108-month warranty looks bigger than the difference between a 7-year and a 9-year warranty. A 95 out of 100 rating looks better than 9.5 out of 10. Is it any wonder at all that interest rates stated by the month or bi-monthly make it hard to calculate the cost of credit?

On another topics, a study by the National Foundation for Credit Counseling found that if confronted with an unexpected bill of $1,000, only 36% of respondents would be able to tap an emergency fund. Either of these studies is depressing enough alone, but together they are a real recipe for disaster. It seems that we are losing ground against the purveyors.  The more we try to educate people, the worse it gets.


I have to confess that I am an attorney who has used a pay day lender in a crunch. I'm not stupid. I know that I'm getting a loan with outrageous APR and a cycle that allows me to carry the loan out over a number of months. I do it because I need the money for something, usually an unexpected bill, and I don't have access to another form of credit. I hate that I don't make enough money to save, but it's just not possible at the moment.

And that's where most of the people are that use payday lenders. It's easy to get cash, and the actual dollar amount charged for the interest is less than banks charge for an NSF fee. Most people know it's the costliest form of credit. But if you need money and it's your only option, that's what you have to do.

Instead of teaching Global Warming and Timmy has Two Daddy's, we need to get our high schools to focus on the basics. In particular, Home Economics type class that is updated so kids understand checking, savings, investments, credit, mortgages, etc. There is absolutely no good reason we don't teach these basic life skills in school.

I would agree with Russ (apart from his first phrase), except the financial services industry is quite a fan of "consumer education." From which I deduce that it won't work.

Russ might want to think a bit more of the "Timmy has Two Daddies" courses, specifically sex ed. Schools already teach it. Girls continue to get knocked up. It's not because they didn't learn their lessons, but the lessons somehow don't seem relevant in the back seat of the car. (The two highest verbal SATs in my HS class were among the knocked up.) Financial firm sales techniques can be far more persuasive than pimply boys.

"A study in the Journal of Consumer Research proved that as a result of something called the 'unit effect,' no doubt a behavioral bias similar to framing, 'people typically fail to realize that the unit of quantitative information is arbitrary.'"

Off topic--I'll remember this the next time I am trying to explain to a student the effect of a grading curve. The unit effect would seem to be the same as with academic grades and perhaps is not just quantitative. Or, as a professor of mine once asked me and put it more succinctly: "You thought you got good grades in law school because you were smart?" Or, another analogy, Grade A ground beef is not perfect--it is just better than Grade B.

"Americans are Innumerate and Broke"

What else would one expect from a country where 60 percent believe in creationism?

It's all in God's hands. And, apparently, so is their financial security.

Not sure about your experience Russ, but as the parent of two children in public schools, (7th and 11th grade), I think the claim that kids are constantly being bombarded with Global Warming and other propaganda is overstated. I do agree that kids are not getting an appropriate amount of financial education and the lack of financial education is problematic. In my opinion there is too much emphasis on standardized tests. Standardized tests are a big profit center for corporations. The cost of standardized testing also places a strain on local school budgets. And worse, "teaching to the test" has become the norm in many schools, at the expense of the educational experience for many kids.

I was being facetious, but there is some truth to it. Bottom line is that our kids aren't learning basic math and financial skills. Teaching how to balance a check book, calculate PITI on mortgages, the basics of investing, managing credit, etc would serve most kids better than teaching some obscure calculus they will forget after graduation. Unless you are engineer or mathematician, when was the last time you used the Pythagorean Theorem?

Further, it would probably help them make smarter decisions as they could then connect how making dumb choices (i.e., having kids you can't afford) are going to affect their lives in a negative way financially. It may also provide some reality in regards to helping them not be so materialistic when they see how much it really costs to live large relative to incomes.

@Russ: First, I completely agree that schools need to teach basic financial education.

But a great big "however": the kinds of problems articulated in the original post aren't financial education issues. They're perceptual issues about how numbers look to people -- i.e., critical thinking problems.

WHY do people think 36 months is longer than 3 years? Because 36 is a *bigger number.* The instant perception gets internalized, and hey presto, if I have 36 months to pay off the car loan, that's much longer than just three years.

So agreed with you, with the caveat: Schools (and parents!) need to teach numeracy first, finances second. Get people comfortable thinking with numbers generally, understanding where and how numbers work and don't work -- then the financial education becomes a lot easier.

Self-control in the back seat of a car, well, that's another topic for another day.

All conclusions are probably right on the money. However, the study's authors are at European universities so it's at least equally likely these are Europeans we're talking about. Wouldn't be so surprised, though, if Americans are even less numerate.

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