The Efficacy of Teaching Financial Literacy Can Be OverstatedLauren E. Willis, a professor at Loyola Law School in Los Angeles, has published an illuminating research paper (pdf) that warns against exaggerating the usefulness of training in financial literacy for equipping consumers to make informed financial decisions.
The argument of Willis's paper is summarized in the abstract:
The dominant model of regulation in the United States for consumer credit, insurance, and investment products is disclosure and unfettered choice. As these products have become increasingly complex, consumers’ inability to understand them has become increasingly apparent, and the consequences of this inability more dire. In response, policymakers have embraced financial literacy education as a necessary corollary to the disclosure model of regulation. This education is widely believed to turn consumers into “responsible” and “empowered” market players, motivated and competent to make financial decisions that increase their own welfare. The vision is of educated consumers handling their own credit, insurance, and retirement planning matters by confidently navigating the bountiful unrestricted marketplace.
Although the vision is seductive, promising both a free market and increased consumer welfare, the predicate belief in the effectiveness of financial literacy education lacks empirical support. Moreover, the belief is implausible, given the velocity of change in the financial marketplace, the gulf between current consumer skills and those needed to understand today’s complex non-standardized financial products, the persistence of biases in financial decisionmaking, and the disparity between educators and financial services firms in resources with which to reach consumers.
Harboring this belief may be innocent, but it is not harmless; the pursuit of financial literacy poses costs that almost certainly swamp any benefits. For some consumers, financial education appears to increase confidence without improving ability, leading to worse decisions. When consumers find themselves in dire financial straits, the regulation through education model blames them for their plight, shaming them and deflecting calls for effective market regulation. Consumers generally do not serve as their own doctors and lawyers and for reasons of efficient division of labor alone, generally should not serve as their own financial experts. The search for effective financial literacy education should be replaced by a search for policies more conducive to good consumer financial outcomes.
In the concluding section of her paper, Willis offers a half dozen policy suggestions aimed at improving the interaction between consumers and sellers of financial services. In general, these suggestions involve "enhancing the resources with which consumers approach the market, changing the financial decision environment, [and] bringing seller incentives in line with consumer incentives" so that consumers' odds of making good decisions (decisions truly in their best interests) and achieving good outcomes are markedly improved.
It is important to note that Willis is not arguing against helping people build the basic sort of financial literacy referenced in previous posts. Rather, she is arguing that people should not be expected to develop the level of financial expertise required to make decisions concerning complicated financial products and services (with the definition of "complicated" encompassing any requirement for single-handed analysis of various financial scenarios, e.g., for retirement planning).