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Strategies & Market Trends : The Residential Real Estate Post-Crash Index-Moderated -- Ignore unavailable to you. Want to Upgrade?

To: ggersh who wrote (96924)	10/6/2013 12:41:54 PM
From: Pogeu Mahone	Read Replies (2) \| Respond to of 119360

Financial Literacy, Beyond the ClassroomBy RICHARD H. THALER EVEN if we grade on a very generous curve, many Americans flunk when it comes to financial literacy. Consider this three-item quiz: Enlarge This Image KYLE FEWELL • Suppose you had $100 in a savings account and the interest rate was 2 percent a year. After five years, how much do you think you would have if you left the money to grow? More than $102, exactly $102 or less than $102? • Imagine that the interest rate on your savings account was 1 percent a year and that inflation was 2 percent. After one year, would you be able to buy more than, the same as or less than you could today with the money? • Do you think this statement is true or false: “Buying a single company stock usually provides a safer return than a stock mutual fund”? Anyone with even a basic understanding of compound interest, inflation and diversification should know that the answers to these questions are “more than,” “less than” and “false.” Yet in a survey of Americans over age 50 conducted by the economists Annamaria Lusardi of George Washington University and Olivia S. Mitchell of the Wharton School of the University of Pennsylvania, only a third could answer all three questions correctly. This is particularly troubling given the inherent complexity of our modern economy. Whether in taking out a student loan, buying a house or saving for retirement, people are being asked to make decisions that are difficult even if they have graduate training in finance and economics. Throwing the financially illiterate into that maelstrom is like taking students currently enrolled in driver’s education and asking them to compete in the Indianapolis 500. A popular approach to this problem is to work harder to improve financial literacy — for example, by including household finance in the basic high school curriculum. One reason to think this solution will have big payoffs is that people who are more knowledgeable about financial matters, as measured by a test, perform better at tasks like saving for retirement and staying out of debt. This may seem a straightforward argument in support of financial literacy courses. Unfortunately, it isn’t. The problem is that measured financial literacy is highly correlated with other factors, most notably higher education in general, so it’s hard to sort out causes. (The ability to solve the Sunday crossword puzzle is probably also positively correlated with good financial outcomes.) So to see whether a financial education curriculum is likely to pay dividends, we should review specific efforts to shore up financial skills in those who are deficient, and not just measure what people already know. A new paper by three business school professors — Daniel Fernandes of Erasmus University in the Netherlands and the Catholic University of Portugal, John G. Lynch Jr. of the University of Colorado and Richard Netemeyer of the University of Virginia — presents a discouraging assessment of attempts to teach people how to deal with money. Their article uses a technique called meta-analysis, looking at results from 168 scientific studies of efforts to teach people to be financially astute, or at least less clueless. The authors’ conclusions are clear: over all, financial education is laudable, but not particularly helpful. Those who receive it do not perform noticeably better when it comes to saving more, for example, or avoiding ruinous debt. Even more depressing, the results of efforts aimed at low-income people are particularly weak. Those who need the help most seem to benefit the least. DON’T get me wrong. I am all for trying to teach household finance in schools, starting as early as possible. And when it comes to high school, I think learning about compound interest is at least as important as trigonometry or memorizing the names of all 50 state capitals. If we try enough approaches, and evaluate what works, we may improve such programs’ effectiveness. But we shouldn’t fool ourselves into thinking that adding a household finance class to a high school curriculum will in itself create knowledgeable consumers who can understand today’s wide array of financial products. In some ways, the finding that financial education doesn’t provide long-term payoffs is hardly surprising. After all, how much do you remember from your high school chemistry class? Unless you use chemistry at work, you probably don’t recall much about ionic bonding. In the meta-analysis, even the most time-intensive programs — those with more than 24 hours of education and training, almost the length of a college course — had no discernible effects just two years later.