Professor argues a little financial literacy can be bad
Have you ever read an academic paper and thought, “Uh-oh. Is my whole life a lie?”
I just read that paper.
Loyola University law professor Lauren Willis wrote “Against Financial Literacy Education” in the 2008 Iowa Law Review, and she eviscerates what I spend my professional life doing.
And it isn’t pretty.
Willis makes a strong case that financial education programs do not work. Well, at the very least, she finds that no well-constructed academic study has effectively proven they work.
True, people often self-report that they seem to know more after taking a course. But studies have not been able to show that financial literacy programs measurably increase people’s knowledge or lead to better choices over time.
That does not prove they don’t work, but she argues that the burden of proof remains with the people funding and advocating for these programs.
Now, this is hard to hear because since at least 2012, financial literacy has been my professional mission. My idée fixe. My white whale.
My guiding principle is that if I do this one thing well, people will live better.
But Willis not only says this doesn’t really work, she goes further. Beyond ineffectiveness, she says that financial education programs have at least two costly effects.
First, a little bit of knowledge can be a bad thing. Overconfidence can lead financial literacy program participants to make decisions as if they understand something when they really don’t. Or a little bit of knowledge may keep them from seeking further information or expert opinions when that’s what is sorely needed.
As she writes: “The gulf between the literacy levels of most Americans and that required to assess the plethora of credit, insurance, and investment products sold today — and new products as they are invented tomorrow — realistically will not be bridged.”
I am on the front lines of this struggle. I write a weekly finance column for a general newspaper audience. I wrote a financial literacy book for new college graduates. I’ve taught personal finance to undergraduates. I consult with friends and acquaintances. I live and breathe financial literacy. Rarely have I stopped to ask: Does any of this work? Am I actually making things worse?
But here’s where things get really frictional. Willis sees the push for financial literacy programs — despite their lack of effectiveness — as serving a political agenda. What’s the political agenda? I’ll give you a hint. The financial services industry quite likes financial literacy programs.
Willis explains: “Because good financial decisions by consumers are less lucrative for many industry players, these firms’ support (for financial literacy) is likely predicated, if not on the conclusion that financial-literacy programs are ineffective, then on the premise that these programs are less effective than other regulatory policies the industry would otherwise face.”
Maybe her language needs unpacking.
Part 1: The programs don’t work.
Part 2: That’s good, because knowledgeable consumers are less profitable consumers for the same financial industry.
Part 3: But the finance industry — which funds a lot of these programs — gets to look good because education can’t be bad.
Part 4: Financial literacy programs take the place of things that might actually work, such as regulation.
The Consumer Financial Protection Bureau estimated in 2013 that the financial services industry spent approximately $670 million on financial education.
That’s a big number, but super cheap compared with what regulation would cost.
The past two months, I have worked with a public school district to improve the financial wellness of their employees. The big idea — I think — is that if teachers can’t get raises, can they learn to make the most of what they do get to become financially stronger?
The fact that I continue to do this work is possibly the triumph of hope over experience.
By the same measure, I’m humble enough to think that I might be totally wrong.