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Which Consumer Financial Education Programs Are Most Effective?: Assuming a Fact Not in Evidence

posted by Lauren Willis

Thank you to the Credit Slips team for inviting me to guest blog.  First I must warn the reader that I am not a real blogger (I’m a bit of a Luddite - I don’t even have a smartphone).  But I’m going to join the 21st Century for a bit here.  Over the next couple of weeks I’ll be sharing my thoughts and some recent research pertinent to modes of consumer financial protection, from financial literacy education to policy defaults to product regulation.  As some of you already know, I have been critical of all of these.  But here I will also suggest some underexplored alternative routes to achieve the same ends of consumer financial well-being that have eluded us in the past.

I'll start today with financial education.  The CFPB would like your comments on “effective financial education approaches that create opportunities for consumers to improve their financial decision making capabilities.”  I thought I had blown up this myth already.  And others keep proving me right.  If you were at this past year’s Boulder Summer Conference on Consumer Financial Decision Making you know that a soon-to-be released exhaustive meta-analysis of past studies demonstrates that financial education does not produce better financial outcomes, and another study using a much larger dataset and a more robust set of controls than past work finds that financial literacy does not lead to improved financial outcomes. 

I have detailed elsewhere why consumer financial education does not lead people to make the decisions and take the actions required for household financial well-being in the United States today.  But here is the quick version: 

A.    The gulf between consumers’ current knowledge and skills and those they need to make the financial decisions demanded of them today is too wide for financial education to bridge.  Teaching people to spend no more than 30% of their monthly income on their mortgage when their monthly payments and income are stable may be possible.  But when people do not know what their future monthly ARM payments will be and do not know week-to-week how many hours they will work, financial education is not going to solve the equation.  Further, the heterogeneity of consumer circumstances today means that there are no one-size-fits-all rules of thumb.  Should you walk away from your underwater mortgage?  It depends.

B.    The dynamism of the consumer financial marketplace – a plus when innovations provide value to consumers – means that course content is quickly outdated.  The high school class that taught you to put three months of expenses into an emergency savings fund?  Not nearly enough in today’s recession, in which those who are unemployed remain so on average for over 8 months

C.    But even proficient up-to-date knowledge and skills are not enough.  The most financially literate among us often make terrible mistakes.  To arm consumers today, financial education would need to change their psychology and values.  Turning optimistic Americans into a nation of pessimists would probably help them manage their financial affairs better, but would retard innovation and creativity and make us all less happy.

D.    Sellers of financial products have the resources to run circles around financial education.  Who is sitting there when a consumer is buying a mortgage?  A salesperson.  What is in front of consumers every day telling them to spend money on credit cards?  Advertising.  Where is financial education?  Physically and temporally far, far away.

What the CFPB should be asking is not what financial education approaches will improve consumer financial decisionmaking, but what we can do to change consumers so that they can function well in the modern financial marketplace.  The answer to that question might be, “Nothing; the government cannot change people and we should change the marketplace instead.”  But here are some possibilities that are at least worth exploring:

1.    Math, math, mathBasic math ability rather than financial literacy seems to matter for financial outcomes.  How do we improve math skills?  As a law professor, a complete answer is out of my depth, but one way could be to do a better job of teaching math in the public schools (although course requirement outcomes are mixed and a significant component of math ability is probably set prior to schooling).  Even better would be to improve future consumers’ prenatal and early childhood environments, because here the impact on math ability is clearer –  in utero exposure to alcohol can decrease math ability and breastfeeding can increase it. 

2.    Executive function, including self-control and the ability to regulate emotion, also appears to matter for financial well-being.  How do we improve this?  Again, some early educational approaches appear to improve self-control and other aspects of executive function.  And again, prenatal and early childhood influences are strong – exposure to alcohol in utero and to highly stressful environments early in life (abuse, household instability such as through multiple foster placements, etc.) can damage the development of executive function.

Admittedly, both of these aim at improving the financial outcomes of the next generation, and policymakers would rather find a quick fix for the poor financial decisions people are making now.  But policies aimed at improving math education, facilitating breastfeeding, decreasing in utero alcohol exposure, and minimizing early childhood stressors might do more for consumer financial decisionmaking than continuing to pursue the myth of effective consumer financial education.


I do a lot of financial education but I must admit that much of the criticism in this blog is correct.

The solutions part doesn't offer much, but still a good effort.

I'm curious what you think of the papers that show payday lending disclosures affect people's borrowing decisions. I am not trying to contradict anything you have written here because these are not about education, but I am just curious for a future post or comment here. Like this one: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1532213

How about the fact that people may know they shouldn't spend more than 30% of their income for rent, but they can't find any place to rent for that sum. In California, 57% of tenants are cost-burdened, meaning that they spend more than 30% of their income for rent. Even in "low cost" states like Texas, half of the tenant population pays more than 30% of income for rent.

Great post. I enjoy your work generally and have cited it many times in my own.

Your criticism of financial education is persuasive, but can't the criticism just be limited to financial education as it currently exists and not as an entire endeavor? You criticize disclosures in your next post, but leave a carve-out for new disclosures that you think do a better job than the old ones. Is there the possibility for financial education that does the job better than the current stuff? If yes, what do you think that would look like?

Instead of "financial education does not produce better financial outcomes" why can't we say "current financial education has not produced better financial outcomes"?

If a carve-out for new financial education doesn't work, then it seems like you are saying we have a large group of folks that are destined for lives as unchangeable financial illiterates, and that is tough for me to swallow.

Thanks for your thoughts.

Thank you for your comment, Jared. My take is that the distance between how consumers function and what society and the market demands of them is too great for financial education -- as it exists now or as it might be reformed -- to bridge. If, however, we as a society decided to make the market function in a more manageable fashion, bringing what is demanded of consumers closer to what consumers are capable of, then good financial education could span that much shorter distance. Thank you again for the comment.

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