Teaching financial literacy does not have a great reputation. It’s a huge industry, producing all sorts of books, web channels, TV shows and even social media accounts — but past studies have concluded that, for the most part, teaching financial literacy is a waste of time.
For example, a frequently cited paper published in the journal Management science It found that everyone who took a financial literacy class forgot what they had learned within 20 months, and that financial literacy had “little” influence on future behaviour. A trio of academics at Harvard Business School, Wellesley College and the Federal Reserve Bank of Chicago have produced a working paper that showed that mandatory Finlit classes given to high school students made no difference to the students’ ability to handle their finances. And the list goes on.
The name that appears again and again in these financial literacy papers and reports is Annamaria Lusardi. She is Professor of Economics and Accounting at the George Washington University School of Business. She is also the Founder and Academic Director of the Global Financial Literacy Center of Excellence at GWU. She and Olivia Mitchell, a professor at the Wharton School of Business at the University of Pennsylvania, published a paper in 2013 that was a study of studies on financial literacy, and was highly critical of the way financial literacy programs are taught. This study has been cited for studies widely ever since.
New hope for financial beginners
Ten years later, Lusardi and Mitchell came out with a new paper with the same title, but a more optimistic one. “The Importance of Financial Literacy: Opening Up a New Field,” picks up where their 2013 study of studies left off, and builds on the two women’s experience teaching personal finance.
The first thing they establish is that, globally, the level of financial literacy is just as sad as it was when they released their seminal paper ten years ago. To prove this, they conducted a survey that asked participants three questions, which focused on interest rates, inflation and risk diversification.
“These are simple questions,” says Lusardi, “but they test the basic, fundamental knowledge that underlies most economic decisions. In addition, answering these questions does not require hard calculations, because we are not testing knowledge of mathematics but rather an understanding of how interest rates and inflation work. The questions also test Knowledge of the language of finance.
How did the respondents do? Let’s just say there is room for improvement. (You can test your own by checking out the paper).
“Only 43% of respondents (in the US) are able to answer all questions correctly,” says Lusardi, adding that the level of financial illiteracy is particularly steep among women. “Only 29% of women answer all three questions correctly, as opposed to 48% of men,” she says, adding that this gender difference is astonishingly stable in the 140 countries in which they took the test.
“We also see…that women are more likely than men to answer that they don’t know/refusal to answer at least one financial literacy question,” she says. These gender differences are likely the result of a lack of self-confidence, as well as a lack of knowledge.”
Lusardi and Mitchell found that young people are also more likely to be disadvantaged in this region, as are people of color. “Young adults show very low financial literacy, with only a third able to answer all three questions correctly. Half of whites can correctly answer all three questions, compared to only 26% of blacks and 22% of Hispanics.”
This is a problem, Lusardi says, and not only because it means that many people are ill-equipped to deal with an increasingly complex financial landscape that can affect their earnings and long-term wealth. There are clear social implications of the fact that white males seem to have a significant advantage over the rest of the population in this region. If that’s not enough, Lusardi says, it’s also a problem for the economy.
“On average, Americans spend seven hours a week dealing with personal finance issues, three of which are at work. People with low financial literacy spend twice as much,” she says. She continues, saying that the impact on the productivity of people who spend most of a full workday on their personal finances while at work is significant. Add to this the consequences of mismanaging assets, investments, mortgages, and other debts, and there is a huge potential impact on the economy.
This idea, Lusardi says, that the damage caused by a lack of financial literacy may extend far beyond the individual — to businesses and even to the economy has not escaped the attention of governments.
“Influential policymakers and central bankers, including former Federal Reserve Chairman Ben Bernanke, have spoken of the critical importance of financial literacy,” the paper says. “In addition, the European Commission has recently recognized the importance of financial literacy as a key step for the Capital Markets Union. Some governments have implemented financial literacy training in secondary schools. Several years ago, the Council for Economic Education (CEE 2013) set national standards for literacy Finance, explaining what should be covered in personal finance courses at school.”
A decade ago, Lusardi and Mitchell were somewhat critical of the financial literacy courses offered by companies and schools. The programs were generally not effective, they said, not because the concept of personal financial education was flawed in itself, but because the various programs were generally not well resourced and often poorly designed.
“Most of these courses in the US were unfunded,” says Lusardi. “There was no syllabus. There were no materials, and the teachers were barely trained. So a gym teacher would teach financial literacy, or whoever they could find. That, of course, wouldn’t work. It wouldn’t work for anyone on the subject. If it were You have a French language course and the teacher doesn’t speak French very well, (the students) probably won’t learn French very well either.”
Furthermore, classes, whether taught in schools or in corporate offices, tend to offer one-size-fits-all instruction, with little or no follow-up. Lusardi says this is a recipe for failure. But those organizations that have recognized the need for financial literacy programs, and have continued to develop them, have made progress, she says.
“Many programs have moved beyond very short interventions, like a single retirement seminar or sending employees to a benefit fair, to more robust programs,” says Lusardi. “Financial literacy is now a formal field of study in the economics profession. Several initiatives have been launched at national levels, and more than 80 countries have established national committees tasked with designing and implementing national financial literacy strategies.”
It’s especially important to teach and solidify the principles of good personal finance as early as possible, Lusardi says, which means starting at home — where kids are most likely to model good financial habits — and at school. To this end, PISA in 2012 added financial literacy to the range of subjects that 15-year-olds need to know in order to be able to participate in modern society and succeed in the job market.
Lusardi says that in the decade since she and Mitchell released their 2013 report, their experience teaching financial literacy has demonstrated that these programs, if taught properly, can succeed.
“Our research shows that much can be done to help people make smarter financial decisions,” she says, noting that a successful course will help people understand basic financial concepts, particularly managing financial risks and risks. It will help them understand the workings of specific financial instruments and contracts, such as student loans, mortgages, credit cards, investments, and annuities. It will also make them aware of their rights and obligations in the financial market.
Most of all, of course, it will attract and retain the interest of students, which is not always easy in the world of dry finance.
“I teach very differently now because of my research,” says Lusardi. “I say, What do you think of this course? And as you can imagine, most students think it’s about investing in the stock market. That’s what personal finance is all about. And I say to them, ‘No, that’s the Happiness Project.'” We talk about all the major and important decisions in your life. And I want to teach you to make it good, because if you do, you will be happy. “
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