Meaningful Returns

Is that sacrilegious of me to ask? Maybe.

I think there are multiple answers here, because the question is actually multiple questions. On the one hand the question is: Is “financial literacy” in its ideal format useful? And the answer to that one’s easy (though maybe not terribly practical): YES. I say it’s not practical, because of course hardly anything in this world is ideal, and the state of “financial literacy” is not particularly close.

On the other hand, the question is: Is “financial literacy” in its current format useful? And that question is much harder to answer. We’re tempted to say, well of course it is! Because surely some level of “financial literacy” must be better than no level at all, right? This is a common thought about the subject, because most everyone realizes that a half-day session on “financial literacy” conducted in an auditorium full of middle-schoolers by professionals who have no teaching qualifications is not ideal by any stretch, but we think it has to be better than nothing. And maybe it is.

But maybe it’s not. In fact, there is some solid evidence which says our “financial literacy” efforts have produced, roughly, zero effect on financial behavior. This is bad enough, but it gets worse to the extent people who have gone through the programs and consider themselves to be “financially literate” have a false sense of comfort about their financial behavior going forward. Making bad or sub-optimal decisions is rough enough, but making bad or sub-optimal decisions while having delusions that they are good ones, well that’s much worse.

So why doesn’t it work? And I ask this question as someone who’s vested in all of this. I’ve been involved (and am currently involved) with a number of “financial literacy”-related efforts as a CPA and as someone whose day job revolves around the types of things it would be ideal for people to know about money. At the end of the day, I think there are two main problems:

1. The first has to do with learning in general. As I alluded to earlier, of COURSE a half-day seminar on budgeting and credit and investing isn’t going to make a bit of difference to a middle-schooler, or a high-schooler, or an adult. That’s not the way our brains work. Can you learn to play the cello in a day, or a month, or even a year? No. And if you could, would it stick with you for the rest of your life without practicing? No. I mean, I took a year of AP calculus my junior year of high school. I made a high A. I destroyed the AP exam. And if you asked me to solve an integral equation today, I wouldn’t have the slightest idea how to do it.
2. The second dynamic is a bit more sinister, and it is that there is little cultural value in becoming “financially literate.” Everything points away from spending less than you make, away from thinking of your long-term future self, away from contentment. So even assuming we could teach all of this and have it stick, we’re still up against the pervasive cultural tide which says “you only live once….”

Maybe by now you think I’m a nihilist. I’m not. I’m stubborn about the fact that we have to keep trying, because the problem still needs a solution. Too many people either don’t have access to the knowledge it takes to financially succeed in the world, or they have access but don’t make use of it. I’m primarily concerned with the first group, but both are important.

So what do we do? Well, the researchers I linked to above advocate for a “just-in-time” oriented education, which would provide answers to financial questions, when those questions arose in the real-world. Right now, “the internet” is a terrible place for just-in-time financial advice, because it’s almost impossible to figure what’s legit and what’s not unless you’re a professional. Perhaps a different sort of just-in-time system would be professionals daring to widen their networks so that they were friends with the poor and the unfortunate who often don’t have access to good advice. I highly recommend Jobs for Life as a way to start doing this.

For now, I think the best temporary fix, as long as we continue to conduct these half-day seminars, is to get away from the nuts and bolts of personal finance (like “Kids, it’s important to know that bond prices go up when interest rates go down”) and move toward high-level concepts that are both easier to remember, and more likely to make a difference to the average person. Kudos to Matt Levine for his take on this today:

It seems to me that there are about two deep financial literacy questions:

1. Does your plan to finance your future lifestyle rely on miracles occurring?
2. If I offer you a 20 percent annual risk-free return, am I lying?

If you can answer those questions confidently and correctly, you can think that bond prices get purple when interest rates are hexagonal, and you’ll be fine.

Got any ideas on how to make “financial literacy” better? Let me know.