Thread by @nikir1

Thread! on financial literacy: tagging those in prior conversation @ramit @dollarsanddata @gabpott @ryanstephans @morganhousel @billsweet @copious28 @theNFaber @Nonrelatedsense @justinisreal @CastiglioneJohn @bryanportnoy 1/

@ramit @dollarsanddata @gabpott @RyanStephans @morganhousel @billsweet @copious28 @theNFaber @Nonrelatedsense @justinisreal @CastiglioneJohn @bryanportnoy My views: I want students to be financially literate. I am hopeful that a program might be designed that can work, and I vastly admire those that are trying, including @FinEdInitiative. 2/

I also think that finance is complex and even basic financial training can be hard for students to absorb, especially those that are math-challenged. If you’re not good at math, financial literacy will likely fail (see later cites) 3/

I tend to agree in many ways with Lauren Willis (whom I cite later). Her view: instead of spending big tax dollars on HS education that doesn’t seem to work, these dollars could be spent on pro-bono unbiased advice to consumers at the point of decision-making 4/

…As an example, In the old days, a local banker would actually work in your best interest. And, mortgages were simpler. With the proliferation of products out there and mortgage distributors, it’s hard for consumers to figure out whom to trust 5/

Another idea from Willis and others: default options (like default into 401(k)) to help consumers act in their own best interest. 6/

This thread reviews research on various prior initiatives, most of which didn’t seem to work. 7/

On to the data: Americans are not financially literate. A recent TIAA-Cref study administered a test of 28 questions on literacy (called the P-FIN test; questions themselves not available). Average score: 49%. 8/

Those with some financial training (HS or college course): 55%, those without: 47%. Better, but still an F in my book. 9/
tiaainstitute.org/sites/default/…

Further: Teachers don’t feel comfortable teaching financial education. 10/ goodcall.com/news/educators…

To the studies: Fernandes et al (2014) review 168 studies on financial education. They find “that interventions to improve financial literacy explain only 0.1% of the variance in financial behaviors studied, with weaker effects in low-income samples.” 11/

More financially literate Americans make better decisions. But can we teach literacy? Should we? See: Hastings et al
12/ justinehastings.com/wp-content/upl…

Hastings et al note: “we need to be able to weigh the cost-effectiveness of financial education against other policy options that also impact financial outcomes.” 13/

Most find no relationship between HS financial education and individual performance on financial literacy tests. See: Jump$tart Coalition for Personal Financial Literacy (2006), Mandell (2008). (Full cites of all papers in Hastings et al.) 14/

Bernheim et. al (2001) look at state mandated HS education: find improvement in wealth accumulation. But Cole and Shastry (2012) do more rigorous study and find no effect on wealth accumulation. 15/

Urban et al (working paper) look at mandated HS education and find that students of the program have better credit scores. 16/
ssc.wisc.edu/~jmcollin/wp/w…

Brown et al (2016) look at HS education and find that both math training and financial education training appear to improve credit scores, but courses in economics do not. 17/ academic.oup.com/rfs/article-ab…

Cole, Paulson, and Shastry (2015): Financial literacy courses do NOTHING to improve financial outcomes/literacy, but additional math courses do! 18/ jhr.uwpress.org/content/early/…

Carpena et al (2011) find: financial education does not improve financial decisions that require numeracy, it does improve financial product awareness and individuals’ attitudes toward financial decisions. 19/

Skinnyhorn (2012) finds that a military financial education program improved 401(k) participation rates but not other financial outcomes: credit card and other debt, foreclosures, and legal actions. 20/

Drexler et al (2011): entrepreneurs get financial education program: one more complex (principles-based), one rule-of-thumb. Those with rule of thumb have better outcomes; implies that way that education is delivered matters 21/

Gartner and Todd (2005) examine randomized credit education program given to college students: those that take program do not manage credit better than those that do not. 22/

Willis (2011) argues that financial literacy may not be sufficient to deal with complexity of financial products that affect ordinary Americans: 23/ jstor.org/stable/pdf/297…

Willis (2011): “A source of expense is the complexity of financial decisions and the heterogeneity of consumer financial circumstances and values." “mass public education campaigns would not be effective. Instead, intensive, audience-tailored instruction would be required.” 24/

Willis again: Lack of interest or even resistance to participation is another obstacle that is costly for financial education to overcome. Voluntary financial education is widely available today, yet seldom used. 25/

Willis again: Industry has substantial resources with which to outmaneuver education. 26/

Willis again: The ultimate challenge for financial education is that even those who are financially knowledgeable and skilled make poor financial decisions surprisingly often. 27/

Willis again: Solutions: One is to provide consumers with pro bono professional assistance to help them navigate the market. 28/

Given that effective education would need to be individually tailored and given in a one-on-one setting, replacing the educators with professional advisors would require comparable professional resources but far less consumer time. 29/

Willis again: Could try to harness biases: Retirement savings defaults have been more effective than retirement savings education, and they cost little to put in place. @R_Thaler 30/

Summary: Strong evidence that financial education doesn’t work very well. Math works a little. Some proposed solutions: just in time interventions, “nudges” to keep people on the right track 31/

Finally, I think that education is wonderful (I am a professor!) You should become educated, go learn all you can. But the question raised in this thread is how the average person benefits from mandatory financial education and the answer seems to be that: she doesn’t. 32/32