Is Financial Literacy a Lost Cause?

In a piece for Slate last week, Helaine Olen took the financial industry to task for their continued push to make financial literacy a priority. She pulled no punches:

There’s only one problem: Financial literacy doesn’t work. One recent study published in the journal Management Science found that studying financial literacy has a “negligible” impact on future behavior and that within 20 months almost everyone who has taken a financial literacy class has forgotten what they learned. For a working paper, Shawn Cole at Harvard Business School, Anna Paulson at the Federal Reserve Bank of Chicago, and Gauri Kartini Shastry at Wellesley College discovered that high school classes imparting financial wisdom don’t seem to make a whit of difference when it comes to how we handle our finances. Others have found that lessons in financial literacy don’t lead to much in the way of increased test scores on the subject.

Olen thinks that consumer protection is the answer, not financial literacy. I’m not so sure that we should give up entirely on trying to instill financial knowledge in people. There just has to be a better way to go about it.

In most schools they try to get students to learn through rote memorization, but clearly that’s a poor way to get someone to actually understand something. There’s a huge difference between knowledge and understanding. Is memorizing a few facts on compound interest, credit card debt or stock market performance really going to help people improve their finances? Of course not. Facts and figures aren’t enough to change behavior, as anyone who has tried to lose weight or quit smoking can attest to.

So I don’t think writing off financial literacy is the problem here. It’s how financial literacy is taught. Most people know that debt is bad and saving is good. But you can’t focus just on the ‘what.’ The focus has to be on the ‘how.’ HOW do you to save more? HOW do you get out of credit card debt? HOW can you avoid making the same mistakes in the future? HOW do you reduce the cycle of buy high, sell low behavior. It has nothing to do with knowledge and everything to do with understanding human nature to be able to change your behavior.

In the 1960s, Yale researchers performed a study in which they were trying to influence students to get their tetanus shots. One group of students was given a lecture on the importance of the vaccine. Afterwards the students proclaimed they were convinced about the benefits after hearing the lecture and planned to get their shots. But in the end only 3% of them actually did.

The second group of students was given the same exact lecture. Only this time they were given a map of the campus to show them exactly where the health clinic was. They also had to sign up on the spot for a date and time to get their shot. The result? This group had a 28% inoculation rate.

It’s not simply motivation, trying harder or gaining more knowledge that affects change, even with Ivy League students. People need to be taught how to design systems to help reduce mental errors. They need that map to help guide them. Financial literacy must be focused not only on gaining more knowledge, but on designing systems to reduce behavioral biases such as overconfidence, decision fatigue, loss aversion, framing, fear and greed and the recency effect.

Without systems that automate good behavior by forcing people to save on a consistent basis, increase the amount they save over time, pay off debt, diversify their investments and stay out of their own way, then yes, financial literacy is a waste of time. But teaching people how to make good decisions up front can have lasting effects.

You can’t just lecture people and expect them to change their behavior. That’s never going to work. You have to show them how to build a repeatable process.

Stop trying to make financial literacy happen (Slate)

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What's been said:

Discussions found on the web
  1. Greg commented on Feb 04

    Hey Mr Carlson
    I enjoy reading your stuff over at Prag Cap

    I have a couple thoughts on your post here.

    Actually I think there is a need for both literacy AND consumer protection. Literacy should start though with some basic understandings and truths about our system of money.

    Debts are not “bad” or “good”, they are the basis of bank created money, which is the prevalent money in our system.

    Saving isn’t virtuous either. Excessive saving by all leads to decreased incomes somewhere. Its a fact. Too many financial seminars focus on the micro and don’t urge people to understand the macro.

    Consumption isn’t bad. Consumption is what drives over 75% of our economic activity. Its where we see consumption that entrepreneurs choose to make a new investment. Too much of econ/finance is dripping with these pseudo Austrian notions of what “good” economic behavior looks like.

    Taking your income and putting some aside and buying a stock from the guy next door isn’t “investment” either. Its simply an allocation of savings and does not drive new economic activity

    I think most Americans do want the economy to do well, they all have family or friends they want to see succeed in the future, but too many have flawed notions about what our country/economy needs. All these calls for slashing of public spending and getting our fed debts under control are ludicrous and are based in flawed models about debt/credit/spending and consumption/production.

    When I listen to most of the guys who are supposedly giving the financial advice, I think most people would be better off sticking their fingers in their ears.

    • Ben commented on Feb 04

      Good points. No need to make it one or the other. Even with the right education, many people need protection from the industry.

      But I also don’t think that individuals should really care about how their debt/saving/consumption habits affect the overall economy. Sure it would be terrible for growth if everyone all of the sudden shunned debt and increased their savings rates. But there’s no way that’s ever going to happen. So people need to understand the difference between good and bad debt and save enough for a comfortable retirement with enough liquid assets for emergencies.

      Bettering yourself and your own situation is what people should focus on. They can’t control economic output so there’s no reason to worry about how they will affect it.

      But I do see your points and it’s a good thing Americans love to consume so much because that will likely never change. That means those that do act responsible with their finances have a leg up on everyone else.

  2. Robb Engen commented on Feb 04

    There’s a big push to teach financial literacy in Canada, not just in high school but for seniors and immigrants as well. The government appointed a task force and a financial literacy leader (Jane Rooney) in 2014 to tackle a wide array of issues –

    I’m all for better consumer protection, though, and this Rob Carrick quote summed it up perfectly: “Buyer beware? That’s a little Darwinian for me. I’d prefer not to live in a financial world where you get your bones picked clean if you fail to read the fine print.”

  3. Mark H commented on Feb 04

    Great post.. to paraphrase Charlie Munger, systems should be designed to help people avoid doing stupid things… it’s much easier than finding ways to make them brilliant

    • Ben commented on Feb 04

      Thanks. Exactly. Getting rid of the unforced errors should be job no. 1 for most people.

  4. David commented on Feb 04

    I would like to add that, although the HOW is crucial for getting people to initiate a behavior, I think the WHY is important for getting people to continue that behavior. For example, it’s a great idea to make it very easy for a new employee to start contributing to a company’s 401(k), but if he doesn’t understand why it’s important for him to do so, he will probably be more likely to cash it out when he changes jobs.

    • Ben commented on Feb 04

      I agree. This is very true. I think this is especially true for younger workers. As people age they eventually figure out the ‘why’ on there own. This is why so many people in their 40s and 50s try to play catch-up with their savings rates.

      The younger generation needs to understand the ‘why’ so that they can start to save early to achieve financial freedom, quit their 9-5 job, pursue their passions, retire early or whatever their desires might be.

  5. Eric commented on Feb 04

    I’m a regular reader and really enjoy your postings.

    As a fee-only financial advisor and fiduciary to my clients, I serve as an advisor, financial planner, advocate and “thinking partner”. No amount of public regulatory “protection” can keep a person from making bad and or decisions decisions regarding their money. Financial literacy is critical – it can prevent or at least reduce a lot of bad decisions; however working with a fee-only fiduciary financial planner (there are some who work on hourly fees, retainers and assets under management fees) is the best and straightest path from here to long term financial security. The Financial Planning Association ( and Certified Financial Planner Board of Standards ( are resources for finding one. Just be sure that they are fee-only if you want an advisor who is legally responsible to hold your best interests before his or her own. And be clear that they actually DO financial planning – not just gather and manage assets for a living.

    Again, thanks for such a variety of interesting posts.

    • Ben commented on Feb 04

      Thanks Eric. I agree with you. Sometimes people just need someone to bounce ideas off of, look at a problem from a different angle, be an objective 3rd party or simply keep someone from making a huge mistake. I like the term ‘thinking partner.’ I feel the emotional coaching aspect is probably one of the more underappreciated aspects of a solid financial advisor. Thanks for sharing.

  6. Packard commented on Feb 04

    For those who lack self-discipline and the personal capacity for developing a modicum of “sincere” humility, no amount of financial literacy training will help.

    Our Millionaires Next Door may not have taken any literacy classes, but they are as a group highly self-disciplined with their money and businesses while their frugal choice to live next to mere median wage mortals is self-explanatory.

    • Ben commented on Feb 04

      Yes, great point. Admitting to and understanding your own weak spots is very important, even more so when managing money than in most other areas of life. I like to say that arrogance has lost more money for people than the financial markets. You really don’t need to know much as long as you are able to control your behavior. Humility is one of the first things I look for in the finance industry for someone that will actually make it over the long haul.

  7. Weekend Reading: RSP Ready Edition commented on Feb 07

    […] Ben Carlson argues that there needs to be a better balance between consumer protection and financial literacy. […]

  8. ill2iowa commented on Feb 12

    One more thing. Every one has a computer now. How about teaching how to use a spreadsheet starting VERY early!

    • Ben commented on Feb 12

      Good point. The rise of smartphones and the internet should actually make it easier to reach more people. Something like the Kahn Academy is a great model for this type of thing.