It’s time to change how we teach investors
Personal-finance classes may be having unintended consequences
By Robert Powell, MarketWatch
Last Update: 1:34 AM ET Jun 7, 2011
BOSTON (MarketWatch) — It might be a stretch to say that Americans, in general, are failures when it comes to investing. But given the amount of time and attention spent teaching people how to be savvy about all things money, it sure seems that way.
We simply haven’t moved the needle all that much. That seemed to be the consensus of the world-renowned experts who spoke at the recent Life-Cycle Saving & Investing Conference at Boston University.
It’s not that investors don’t understand how the economy and markets work, though that is a problem. The problem is that we have — recent trends notwithstanding — a low savings rate and high personal debt. What’s more, average investors typically have poor investment results, with various studies suggesting they tend to buy high and sell low, or trade frequently and at the wrong times.
We keep trying to teach people (children, teenagers, young adults, 401(k) participants and the like) about money at all the wrong times, using all the wrong formats and methods of delivery.
Experts said the time is now to think differently about how we teach people about investing, with some advocating for increased use of financial entertainment, or what some call edutainment. Others are calling for increased use of just-in-time learning programs, and still others say this nation needs to address the heart of the matter.
Personal-finance courses may hurt, not help
We also need to approach investor education with a “sense of humility,” said Stephen Horan, a CFA charterholder and head of private wealth management at the CFA Institute. “There’s a lot out there that we don’t know,” he said. “There’s a lot of research and there’s a lot of investor education, but there’s really not a lot that we know about the outcomes.”
We need to approach investor education with a sense of humility about “what we think the right answers really are,” he said.
At the core, one reason why Americans are illiterate when it comes to money and investing has to do with numeracy, Horan said. There’s simply a lack of it among the general population. And, “when we look at the efficacy of financial literacy programs the evidence is not all that compelling,” said Horan.
Horan said that Lauren Willis, a professor at Loyola Law School, published a paper in 2008 in which Willis noted that financial education, for some consumers, appears to increase confidence without improving ability, leading to worse decisions.
Horan also referenced a study that found that students in personal-finance courses often do worse on tests than students who didn’t take a personal-finance course. “We run the danger of creating overconfidence among an investor base and giving the illusion of education and the illusion of knowledge,” Horan said. “That creates a setting where you can actually make worse decisions than they might have otherwise.”
Yes, there’s a sketchy track record for investor education. “When the education is directed specifically at financial literacy, it doesn’t seem to be particularly effective,” said Horan. “Education around numeracy does… Numeracy is the foundation by which people understand economics and finance.” Horan said investor education without numeracy is like composition without grammar.
Investors may need a pro’s help
To make investor education work better, Horan said it should start long before individuals become investors, even before they become savers. In addition, he said economic literacy depends heavily on numeracy and incentives.
Horan suggested educators might consider breaking down the skills they need to teach into three categories, not unlike categories in driver education. There are basic or universal skills. With driver education, it’s defensive driving; with money, it’s budgeting. There are do-it-yourself skills. With driver education, it’s checking fluid levels; with money, it’s diversification or dollar-cost averaging. And then there are the expert skills, skills that are good to have but best left in the hands of a professional. With driver education, it’s changing brake pads; with money it’s asset allocation, risk management and security selection.
“There are tasks that people really ought to delegate to the experts,” said Horan. Knowing when you need a mechanic is perhaps more important than knowing how to replace your own transmission. “It’s important to get people to know what they don’t know and knowing when they need to get help,” he said. “We can talk about investor education, but there will be a point at which we need to leave decision making up to an adviser. We need to get people to the right place. Financial advice picks up where education leaves off.”
For her part, Willis is also of the opinion investors might be better off using advisers for certain tasks rather than doing it themselves. “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,” she wrote in what Horan said he regards as the seminal paper on investor education. Read Willis’ paper, “Against Financial-Literacy Education,” here.
So rather than focus this nation’s efforts on teaching people about money, Willis says the “search for effective financial literacy education should be replaced by a search for policies more conducive to good consumer financial outcomes.”
Besides teaching people the basics, Horan said educators need to focus on the format and delivery of content. “We need to go to where the investors are. They are not going to come to us. We need to provide them information in a format that they are expecting to receive it and are likely to receive it.” Horan said the most popular content on the CFA Institute’s website have headlines such as the “The top 10 investment tips from rock and roll.” Said Horan: “We know what it takes to capture people’s attention, and that’s the first step to any kind of educational process.”
Financial entertainment might be the answer
Other experts, including Nick Maynard of the D2D Fund and Peter Tufano, the new dean of Oxford University’s Sad Business School, said they believe that financial entertainment is among the better ways to teach people about money.
For his part, Tufano suggested that educators need to make financial information engaging and ubiquitous. Consider, for instance, the success of Celebrity Calamity, a financial literacy game, and other titles such as FarmBlitz and Bite Nightclub in the financial entertainment space. Play Celebrity Calamity at this website.Learn more about financial entertainment at this website.
At the moment, Tufano said there’s not much evidence that financial entertainment is effective. But then again, it’s still a bit early. It took a few decades before we learned that Sesame Street helped children become more literate about the alphabet before entering kindergarten and first grade. We just might be at the start of a similar revolution with regard to financial entertainment.
