Are We Taking the Wrong Approach to Financial Education?
The findings are mixed, but there are ways to improve the effectiveness of financial literacy programs.
It's well-documented that people make simple financial mistakes that can have drastic consequences. For example, research shows that many people don't contribute enough to their 401(k) plan to take advantage of their employer's match, fail to choose fee-minimizing portfolios, or avoid investing in the market.
What's behind these missteps? Studies suggest that many of them may be caused by a lack of financial literacy. And, unfortunately, many traditional financial literacy programs may not be effective in preventing some of these mishaps.
Although research has found that there is a relationship between financial literacy and better economic outcomes, few results have found that literacy is what causes these outcomes. In other words, individuals might be learning by doing, and though they eventually end up with better economic outcomes, they're still making mistakes along the way. Thus, the relationship may be reversed, in that people build financial literacy by participating in certain financial behaviors they already wanted to undertake.
Many meta-analyses have investigated the effectiveness of financial literacy programs, with mixed findings. While some find a positive effect, others do not, and still others find mixed effects based on the financial behavior in question. To sum up the existing research, it seems as though effectiveness depends on various factors, such as the intensity and length of the financial literacy program, the financial behavior being tested, the participants in the study, and the overall design of the study.
These mixed results shouldn't be seen as a sign to dismiss financial education. Instead, they mean there is more work to be done.
Although these findings don't exactly provide clear guidance, there is hope. First of all, research suggests that there are some benefits to taking a general financial education class. This form of financial literacy program brings about awareness to some financial tools and topics that could be useful later. However, this should be seen as the start of the process--a first step to making more informed financial decisions in the long term.
Here are a few promising next steps from the research:
In recent years, the effectiveness of financial education has been questioned by the research community. These critiques have a point: Research suggests that taking a financial education course in grade school may not help improve financial behaviors in the long term.
However, research also points to ways to improve and complement traditional financial education programs. In a modern world of advanced algorithms and ever-increasing financial complexity, it's important that we optimize our financial literacy efforts to help individuals make informed decisions.