Tweet
Is teaching personal finance education in schools just a waste of time?
Yes, says Lauren Willis, Professor at Loyola law school, Los Angeles
Pundits and politicians repeatedly opine: "If only consumers were better informed." Consumers echo the sentiment: "If only I had understood what I signed up for." The implicit premise is that financial illiteracy caused the financial crisis, and financial education is the solution.
In the US, 28 states require that at least some financial education be taught, and others may follow. The sponsor of federal legislation to fund these classes argues that financial health "all begins with being able to read the fine print, and make the right financial decisions".
But there is no reliable evidence that teaching people to read the fine print leads to better decisions. After taking a course, students say they intend to change their financial behaviours, but follow-up studies reveal virtually no improvement.
The gulf between consumer skill levels and those needed to understand the diversity of modern financial products may be too wide. Only a very small proportion of adults can take a loan amount, monthly payments and loan duration in months, and calculate the total interest on a fixed-rate loan.
The maxim "Spend no more than a third of income on housing" only helps when consumers can use fractions, identify monthly mortgage payments and assess how much they will rise.
Most borrowers with adjustable-rate mortgages do not know how much their future payments will be, and many do not even know that their payments can change. Moreover, by the time the latest developments filter through, the marketplace has often changed.
Knowledge and skills are insufficient for most good financial decisions, which rely on accurate forecasts. But people discount future risk while overvaluing immediate benefits. And the sophisticated are not immune. In experiments, MBA students, who knew they should select index-fund investments based on fees, were subconsciously influenced by information about past fund performance that they knew to be irrelevant.
People are not stupid. They have better things to do than spend hours upon hours trying to understand and keep up with the marketplace.
Also, the classes can be counter-productive, leading to over-confidence and risky financial behaviour. US high school seniors who have taken such personal finance courses have slightly lower scores on tests than students who have not. Students who play educational money games learn the terminology, but report poorer financial habits than students who do not play.
The belief that personal finance education will cure our financial ills is based on ideology, not evidence. Although borne of good intentions, the costs exceed its benefits.
In the name of empowering consumers, we are setting them up to fail.
No, says the Wendy van den Hende, Chief executive of Persoanl Finance Education Group
Some things are too important to be left to chance. Financial education is one.
It's clear from the difficulties that so many people are experiencing that we can't rely on families to teach children how to manage money, as many of them do not know how to do it themselves. This is not to blame individuals who are victims of the global recession, finding themselves unemployed or in negative equity. Nor does it excuse the irresponsible lending from some of the financial institutions.
We are failing our young people if we do not invest in their future. When they leave school they will have to make complex decisions that will have long-term consequences. If they go to university, will the course they follow lead to high-paid employment, or will they spend the next 10 years worrying about repaying their debts? If they go to work, will they be able to afford to move into accommodation of their own, or will they continue to exploit their long-suffering parents? Can they afford to have a family?
Research we conducted last year showed that more than three-quarters of seven- to 11-year-olds saved - with one in 10 saving for a car, house or university. But by the time they became teenagers, more than half were in debt to friends or families. What happens to these sensible children as they get older? Opportunity, peer pressure and media influences all contribute.
That is why the approach that the Personal Finance Education Group - or pfeg - takes is so important. It is an educational charity and we believe that all young people need to be able to make independent and informed financial decisions.
Personal finance education isn't only about learning the jargon or understanding financial products - it's about young people understanding their own attitudes and behaviours.
Pfeg also believes that the best place to start is at school, and as soon as possible. There we have a captive audience - what's more, it is an audience that is very interested in money and recognises its relevance. The average eight-year-old has a mobile phone and, by the time they are 10, many have shopped online using their parents' credit or debit card. Many young people have part-time jobs while still at school and, as parents often know to their cost, are avid consumers. This gives a sound foundation on which to build from youngsters' own experiences.
Boys who do not find maths appealing can be motivated in a financial context. A primary school used the tale of Jack and the Beanstalk with the six-year-olds helping Jack look after the gold he had taken from the giant. One of the elements of the lesson was to distinguish between wants and needs.
I have yet to meet an adult who doesn't say that they wished they had received some financial education at school. Please don't short-change our children by saying it's a bad idea.
guardian.co.uk © Guardian News & Media Limited 2009 | Use of this content is subject to our Terms & Conditions | More Feeds
More...
Comment