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Symposium 2012

Proposal - To minimize devastating financial mistakes, focus financial education at the point of sale.

The Challenge

As governments face increasing debt burdens and companies too face significant cost burdens, there is a clear movement towards individual responsibility for financial planning for retirement. This mov ...

As governments face increasing debt burdens and companies too face significant cost burdens, there is a clear movement towards individual responsibility for financial planning for retirement. This movement is happening at precisely the time that individuals themselves are feeling more insecure about the future in the face of declining job security and the increased reluctance of financial institutions to provide credit.

Much of the economic downturn that has affected the world’s industrialized nations has been blamed on poor financial decision-making by consumers who took on too much of the wrong sort of debt, fed the growing real estate bubble and made numerous and costly financial “mistakes,” presumably as the result of low levels of financial literacy. Two primary solutions have been proposed to prevent these “mistakes” from reoccurring: financial regulation and financial education. While financial regulation, in the extreme form of a single, approved “plain vanilla” product for each financial need (e.g.: a fixed-rate 30 year home mortgage) or the somewhat less extreme qualified default product could reduce some tragic financial mistakes, it would come at the expense of financial innovation which has helped drive down costs and increase opportunities for many middle-income consumers. 

The alternative solution is that of financial education which imposes the burden of choice on the individual who would also have to bear the consequences of any mistakes. As one might suppose, the argument of regulation versus education has become political. Much of the support for financial education comes from financial service providers as well as those who favor limited government involvement in the economic system. Professor Lauren Willis, a well-known critic of financial education, says that it is an attempt to “blame the victim.1” The real question, however, relates to its effectiveness. Can financial education greatly reduce the number and severity of financial mistakes made by consumers while still allowing for the rapid diffusion of useful financial innovations? If so, what types of financial education are likely to be most useful?

I was fortunate to have been one of the first professors involved in the financial literacy movement when it began in the US in the mid 1990s. As educators, we believed that financial literacy could be greatly improved through formal, school-based education. Naively, we set a time-frame of 10 years to “solve” the problem. To document our progress, we created a nationwide test of the financial literacy of students in their last year of secondary education and administered it through the first Jump$tart survey in 1997-982. This survey was replicated every two years through the hypothesized 10 year “solution” period3.

Not only did mean financial literacy scores fall through this period, but when scores of the (approximately 20 percent of) students who had taken a full-semester course designed to improve financial literacy were compared to all students, we found no significant difference. Courses in financial literacy, generally taught by teachers trained in the subject4, were not working. While pre and post testing of the students often finds that scores do improve as the result of the courses, when students were tested some time after they had taken the course, little had been retained5. The concepts and information did not prove to be sticky!

In retrospect, why should we have suspected otherwise? Students in their late teens have many pressing concerns, but financing retirement or a home are not among them. The solutions to complex adult decisions, which they would not have to make for 10 years or so, were not worth retaining, particularly in a rapidly changing economic environment.

But what about adults who are confronted with these important decisions; wouldn’t they be anxious to learn and retain this type of information? They certainly have more motivation than teenagers, but now the question turns to how and when they can learn. Since adults are no longer required to attend school, it is not easy to get them assembled in classes, and lacking the carrots and sticks of grades, it is virtually impossible to get them to focus on difficult subject matter. Studies of workplace financial education6 find that those who show up for free classes offered by their employers constitute a tiny proportion of the workforce and are generally those who are more highly educated and knowledgeable about the subject than their co-workers. We call these adults who attend such classes to further refine their skills “fine-tuners.” This has not been found to be a cost-effective way to prevent costly mistakes among the majority of adults. In fact, an unpublished study of my own found that even educated “fine-tuners” who signed up for an excellent on-line program in investments, were likely to drop out after completing just a few of the modules.

In recent years, an attempt has been made to financially educate otherwise unreachable adults through “infotainment,” a mass media combination of information and entertainment. This is most commonly done through televised dramas and “soap operas” such as the telenovelas that are so popular in Latin America. While the potential reach of infotainment is great, its educational effectiveness7 is necessary limited by the need to continually entertain the audience, which precludes going into needed depth about complex financial products.

Perhaps the most promising work has been done by Lusardi, Keller and Keller8 who have found that financial education prior to making an important financial decision is very effective. New Dartmouth University employees were required to attend a tailored seminar on choosing retirement products immediately prior to their formal selection of such products. It is not surprising that this method is effective since these adults are highly motivated to learn about products that they must soon choose and by minimizing the time between education and “purchase,” memory decay is greatly reduced.

This is the basis for my proposal to focus financial education on adults who are making an imminent decision and as close as possible to the point of sale. How is this logistically possible? There are a number of possible solutions, some of which are now being tried.

  1. Tie employee financial benefit choice to mandatory employee education so that education leads to immediate implementation. This can be done for new employees as well as those in transition (promotion, retirement, termination).
  2. Require mandatory counseling, by certified counselors, prior to the purchase of subsidized financial products. A current example is for FHA-financed reverse mortgages sold to consumers over the age of 62, some of whom have diminished cognitive abilities**.
  3. Improve mandatory disclosure of critical financial information at point of sale for important and complex financial products such as mortgages, annuities or mutual funds. While this is being pursued by both in the US by both the Security Exchange Commission and the Consumer Financial Protection Bureau, many consumers will ignore the bland statistics that are meaningless to them, no matter how they are arranged or presented. An alternative, complimentary approach could utilize adversarial disclosure consisting of outright, specific warnings written by knowledgeable consumer advocates. The extreme form of adversarial disclosure (not recommended here) was pioneered in Singapore and recently adopted by Australia in the form of graphic color photographs on the cover of packages of cigarettes of those who have been most adversely affected by smoking.
  4. Allow and encourage banks who offer educational programs on how to save (often during “America Saves” week in the US) to open accounts immediately for attendees who have been both educated and motivated to do so. Currently, this action is discouraged as being “self-serving” by regulators who award Community Reinvestment Act credit to banks who educate but do not utilize that education to allow consumers to implement that education.
  5. Use technology, such as smart phones that recognize QR codes, to integrate consumer needs with product attributes and regulatory data bases to screen proposed products at or near the point of sale.

 


1 Lauren E. Willis, Against Financial Literacy Education Iowa Law Review, Vol. 94, 2008

2 Lewis Mandell, Our Vulnerable Youth: The Financial Literacy of American 12th Graders Washington, DC. Jumpstart Coalition, 1998

3 A summary of all Jump$tart surveys may be found in Lewis Mandell, The Financial Literacy of Young American Adults: Results of the 2008 National Jump$tart Coalition Survey of High School Seniors and College Students, Washington, D.C.: Jumpstart Coalition, 2009 http://www.jumpstartcoalition.org/upload/2009_FinLit-Mandell.pdf

4 Lewis Mandell, Financial Literacy: Are We Improving? Results of the 2004 National Jump$tart Survey Washington, D.C.: Jumpstart Coalition, 2004

5 Lewis Mandell and Linda Klein “The Impact of Financial Literacy Education on Subsequent Financial Behavior” Journal of Financial Counseling and Planning (2009, Volume 20, Issue 1)

6 Lewis Mandell Financial Education in the Workplace: Motivations, Methods and Barriers, Washington D.C.: New America Foundation, 2008 http://www.newamerica.net/publications/policy/financial_education_workplace

7 Currently being evaluated by the World Bank: Robert Holzmann Bringing Financial Literacy and Education to Low and Middle Income Countries: The Need to Review, Adjust, and Extend Current Wisdom World Bank SP Discussion Paper, No. 1007, July, 2010.

8 Annamaria Lusardi, Punam Anand Keller and Adam M. Keller New Ways to Make People Save: A Social Marketing approachI, NBER Working Paper 14715 http://www.nber.org/papers/w14715

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