I ran across an interesting article the other day which featured an interview with Lauren Willis, an associate law professor at Loyola Law School in Los Angeles. The name of the article is Why You Can’t Teach Money and it’s a question and answer session between a writer at Money Magazine and Lauren Willis. Lauren essentially says throughout the article that it’s dangerous to try to teach people about money. I’ll outline some of the points she has made and tell you why I think overall her argument is flawed.
Financial Education Doesn’t Work
Lauren came right out and said that what’s bad about financial education is that it doesn’t work. Following is the reason that she gave:
Sellers of financial products spend billions drowning out well-meaning messages to consumers from nonprofits or government agencies. Also, financial products are always changing – credit and insurance products have changed dramatically in the past 20 years – making it hard for educators to keep up.
She has several good points, but the overall message is flawed. The marketing departments of financial corporations are huge and they do literally spend billions of dollars a year trying to market their products to the consumer. Likewise financial products are changing. This can definitely present some challenges to financial education. It’s hard enough to battle a billion dollar marketing budget, but when you through constantly changing products it makes it very difficult indeed. However to assume that just because financial education is facing some very large obstacles to overcome does not make it okay to say that it just plain doesn’t work. That’s an end-all statement, one which I’m convinced is completely incorrect.
Don’t Even Bother Teaching The Basics
The next question asked of Lauren was in direct response to her opinion that financial education doesn’t work. The interviewer asked:
But aren’t basics such as budgeting always applicable?
Teaching them is a waste of money. Studies show that sending people to either high school personal-finance classes or adult retirement seminars does not result in better financial behavior. It may do the opposite. Financial literacy classes give people the illusion that they can successfully manage their finances. So rather than seek help, they end up making worse decisions.
I’m interested to know more about these studies that show that personal-finance classes do not result in better financial behavior. If anyone out there has heard anymore on this then please let me know. “Studies” in and of themselves are generally a waste of time and quite often biased towards the end conclusion.
Some people who take financial literacy classes may be naive enough to believe that they can with 100% certainty manage their entire financial lives. Maybe some of us can. I think I’m smart enough to admit that I don’t know everything about everything when it comes to personal finance. I also believe that most people are more than willing to ask for help when it comes to subjects they are less-aware of. If this wasn’t the case then I wouldn’t have a single reader at this personal finance blog because no one would need advice, tips or even care what financial decisions others have made. Her point therefore is a moot point. People generally seek help, even when they have taken financial education classes.
I believe that basics such as budgeting are definitely always applicable. It’s good to know the basics of personal finance. Otherwise you may be taken advantage of not only by finance companies but even by a financial advisor – someone who is supposed to be helping you!
Regulate, Regulate and Regulate Some More
Professor Willis knew that an argument against hers would be that if you don’t know the basics then you could very well be taken advantage of by an unscrupulous lender (sound familiar) or maybe an insurance salesman. She briefly covered this when asked by the reporter what we should do, if not teach people financial basics. Her answer:
Stop trying to turn everyone into a financial planner. Instead, try to get everyone to understand that the people selling you financial products often don’t have your best interests at heart. What’s more, politicians need to regulate financial products and make them into things that will benefit consumers, rather than expect education to be the cure-all it is not.
I agree with her that we should teach consumers that people selling financial products often (if hardly ever) don’t have your best interests at heart. This should indeed be part of any well-planned financial education curriculum. However I’m strongly against further regulation of financial products, at least to the point that she is recommending:
Sellers could be required to offer you a default product that is safe. Whenever you applied for a mortgage, for example, you would have to be offered a 30-year fixed amortizing loan.
While I don’t anticipate myself needing anything more than a 30-year fixed loan when I do eventually purchase my first home I think that an uneducated consumer (that knows nothing about other types of mortgage loans) who would benefit more from a 5-year ARM being sold a 30-year fixed right off the bat (due to federal regulation) would be downright silly and possibly disastrous to our financial system. Such intense regulation would cause serious damage to financial firms who would have to pass on the pain to the consumers in the form of lower savings rates, higher loan rates and higher insurance premiums.
More intense regulation is not the answer. Financial Education is. I completely disagree with her that it is pointless and a complete waste of money. It needs to be done correctly and it needs to be backed up by parents, friends and relatives. Instead of regulating where regulating need not be done (thereby making our financial system less competitive) why don’t we find more creative and effective ways of teaching financial education. It can work and it will work if we do it right.
To the credit of Professor Willis’ argument I will say that in the interview she seemed to imply (but never explicitly state) that she was not against financial education altogether but rather against government-sponsored financial education (such as The Economic Recovery Act of 2008).