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1 August 2013 CFA Institute Journal Review

Teacher, Leave Them Kids Alone (Digest Summary)

  1. Hue Chye Ling

Many consumers seem to be barely financially literate even after receiving financial education. Financial education does not excite its students, and there is an observable lack of transference of knowledge into good financial behavior. Furthermore, the prevailing wisdom in finance changes over the course of time. One solution governments can pursue is to make default financial options safe and inexpensive.

What’s Inside?

More than half of Americans over the age of 50 correctly answered two simple financial questions on interest and inflation in a recent survey. The author highlights the lack of financial literacy among the general population, the apparent immutability of financial behavior despite financial education, and some ideas for solving these problems.

How Is This Article Useful to Practitioners?

One idea for policymakers is to provide more financial education. In Britain, for example, financial literacy was recently added to the national school curriculum. But various surveys have found no conclusive evidence that financial education translates into more financial knowledge or better financial behavior. A survey of students from a Midwestern U.S. state found that students who had not taken a financial course were more likely to pay their credit card in full every month than counterparts who had studied the subject.

Another example would be timely and targeted financial education for individuals who are purchasing a house or struggling with credit card payments. But this approach also has limitations. In one example, 0.4% of struggling credit card borrowers logged on for a free online financial literacy course and only a meager 0.03% completed the course.

Financial practitioners should also note that the current prevailing wisdom can be proven wrong in the future. For example, it was thought that pension portfolios with high equity allocations would earn high returns and reduce the contributions required by individuals. After more than a decade of turbulence in equity markets, we know such a supposition is too simplistic.

One takeaway for governments is that it might be beneficial to provide limited choices for the populace and make the default option as safe and inexpensive as possible. Consumers often avoid making financial decisions. For example, when firms offer a range of pension funds, the default option has the largest number of subscribers.

Abstractor’s Viewpoint

The challenges notwithstanding, the author believes we should persevere with financial education in order to prepare the children of today for life’s financial challenges. I agree that we should try new teaching methods, such as video games. But mandatory financial education would be expensive, and free financial advice is usually biased.

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