OPINION: Financial Education Is Not Enough in Today’s Economy: We Need Financial Capability
Tuesday, May 19, 2015
The Great Recession has served as a flash point for public discussion about Americans’ finances, exposing their poor financial health and limited financial knowledge. In addition to systematic failures in financial regulation and misconceptions of risk, blame has sometimes been levied against individuals withlimited financial knowledge for contributing to the recession. This latter explanation implies that the recession’s effects would not have been as wide or as deep if individuals had had the right financial knowledge. In any case, it’s a complex financial world in which responsibility is increasingly shifting to individuals to make the financial decisions today that are critical to their financial health in the future.
Financial education is proposed as a solution to Americans’ limited financial knowledge and, subsequently, a way to improve their financial health. Financial education(1) refers to the passing on of financial knowledge that takes place either individually or in groups through workshops, seminars, trainings, and planning sessions in school or employment settings. The Great Recession aside, there is good reason to be concerned about the level of Americans’ financial knowledge. For instance, only 9% of 15-year-olds in the United States demonstrate the type of competency on advanced financial knowledge questions that would be necessary for making informed decisions for taking out student loans, interpreting mortgage agreements, or comparing investment portfolios.(2) In other words, individuals may make healthier financial decisions and behave in more financially optimal ways when they are better educated.
If this is true, then an individual’s financial knowledge gained through financial education should be a strong determinant of their financial behavior.(3) However, a recent review of over 200 studies has raised questions about the effectiveness of financial education, revealing that its influence on behavior may be relatively small and that any measurable effects disintegrate over time. Proponents of financial education explain these small and disintegrating effects by arguing that existing studies do not rigorously evaluate or consistently implement financial education, carefully match the education received to the corresponding behavioral outcomes that were originally targeted for change, or capture financial knowledge gains that develop cumulatively across the life course. These explanations and interpretations of practically null findings are indeed important. It is easy to understand why general financial education covering topics like insurance and interest rates might have little measurable effects on such behaviors as saving for emergencies, purchasing a home, or saving for retirement, for instance.