Teaching financial literacy doesn't appear to have much impact on financial outcomes later in life

A few days ago I posted about the findings regarding the level of financial knowledge in the general population and how that might bode for life financial outcomes. That post was Income churn and financial basics.

Now there is Financial Literacy by Alex Tabarrok, covering the same source study.

A couple of things of interest. Take a look at the comments. As is often the case at Marginal Revolution, the reader comment section is as valuable as the original post. In this instance the commenters are drawing attention to numerous, and perfectly valid, issues related to definitions and context. But what caught my eye was Tabarrok's content (and the links are all worth clicking through for further good information.)

Some of the variation can be explained by experience. The Japanese, for example, don’t have much experience with inflation in recent decades and they perform poorly on that question. The questions, however, can hardly be considered esoteric and a large literature indicates that the ability to answer these questions correlates with the ability to intelligently make real and important financial decisions regarding mortgage refinancing, credit card borrowing, and retirement planning.

Most states now require that financial literacy be taught to high school students and there is some evidence that teaching financial literacy improves financial outcomes later in life but the evidence is not strong and most teachers still feel that they are unqualified to teach the basic concepts.

This is akin to discussion in children's literature circles. Many people espouse a conviction that it is important for children to see themselves (by race or gender or class, etc.) in children's books and other are quite strident that children should be exposed to various "others" (race, gender, class, etc.) My position, for which I am routinely berated but never refuted, is that there is no evidence regarding beneficial life outcomes and content reading. There is clear correlations between life outcomes and volume of reading (positive) but no evidence that reading about people with whom you might identify by race or class or reading about people of different races and class has any impact at all on life outcomes. Reading a lot has a clear causal linkage. The primary effect seems to be in terms of vocabulary acquisition which is in turn related to education attainment and life outcomes. There appears to be a real, but weak, relationship between knowledge acquisition from reading and life outcomes.

It is a seductive argument. These people are SJWs (social justice warriors). They want to fix other people's lives for them. They believe that reading about people that look like yourself is materially beneficial and shapes life outcomes. They just don't have any evidence to support that enticing assumption and even more troubling, they are unable to refute the extensive evidence that contradicts their core assumptions.

We have an analogous issue here. There is clear evidence that people with high wealth accumulation are reasonably knowledgeable and have a reasonably sophisticated financial understanding. It is not unreasonable to assume that that knowledge is therefore instrumentally contributive to wealth accumulation.

The clearest victims of the housing bubble and the Great Recession have also clearly been those with the least financial acumen. The contracts and financial obligations undertaken by many without any real understanding of what they were committing to is astounding. While some small degree of that can be apportioned to disreputable financial institutions, much of the after action reporting and research indicates that misrepresentation was only a small issue. Even understanding the detailed contracts was only a small part of the issue. At its core, most people were irrationally optimistic and chose not to look at the implications of scenarios other than the most rosy. Perhaps this was abetted by a poor understanding of compound interest, balloon payments, inflation, interest, risk but the evidence that more knowledge would have made much a difference is equivocal. This appears to be much more of an issue of faulty value systems (as reflected in personal goal setting) than an issue of knowledge deficit.

Click through Tabarrok's links to see that the belief that educating people about personal finance improves financial outcomes is very weak. The logical belief that educating people about personal finance should lead to better financial outcomes is, as with children and diversity in reading, logical and seductive. We want it to be true, and possibly it is true - it's just that there is no evidence supporting that it is in fact true.

Maybe if we train teachers better. Maybe. But in the links and discussions, the evidence is that the knowledge, if not used within a year, is essentially worthless. Perhaps better teaching might make a difference. More likely this is tied to the much deeper and more challenging issue of values rather than knowledge. However, Teaching Adolescents To Become Learners The Role of Noncognitive Factors in Shaping School Performance: A Critical Literature Review by Camille A. Farrington, et al. lets us know that teaching values and behaviors, non-cognitive skills, is even more challenging than the already difficult task of teaching facts and figures.

Financial literacy around the world by Annamaria Lusardi and Olivia S. Mitchell.