Friday, January 10, 2014

Pacific Standard Has Financial Literacy All Wrong

In the Pacific Standard this month, Helain Olain takes a shot at criticizing the merits of financial literacy. She compares the campaign to a faith-based initiative, the
type that is trying to convert everyone to a cause. It's a good piece, but Ms. Olain seems to miss the point. 

The paper focuses on her protagonist,Dave  Cannon, an entrepreneur who has built a hefty debt. He, along with his wife, have incurred over $70,000 in debt. This after he completed two finance courses at qualified business schools. There's also mention of two studies that show just how insignificant financial education is in helping individuals manage their finances. 

Here's the thing: we expect an entrepreneur to rack up some debt. Ms. Olain never delves deeply into her orotaganost's experience, only to mention that he was in debt. It's not clear whether this was accumulated debt over a period, or whether he was a careless spender, or whether he made bad business choices - only that he was in debt. And then the school loans. I'm not personally aware of anyone not carrying one, unless they were fortunate enough to qualify for a full ride or financial assistance. 

Now about the studies. There have been numerous conclusions in the past that have shown financial education to be ineffective. But what the Pacific Standard piece leaves out are the exceptions. Studies can be misleading in that there are circumstances that are overlooked because they are conducted in control environments. The World Bank examines several, but I'll discuss that in another post. 

One of the studies mentioned is set to be published in an upcoming issue of Management Science. Several leading marketing experts concluded that participants had forgotten all they learned in their financial literacy classes within 20 months. Granted. This after the proliferation of financial education material is criticized. 

It's unusual to expect anyone to remember anything after brief exposure to any given subject. I once had an economics professor confess that he didn't begin to understand that subject until after graduating with an MBA. Which is the reason behind the wealth of financial literacy exposure the paper attacks. Some of that is shared by those with underlying agendas, as the article points out, but that's the case with just about anything. 

As a financial literacy instructor, I can assure you that this campaign is more than just teaching money management. It is about informing  the public how to make sound choices. It's also about knowing what sources to consult, how to distinguish between the money grubbing opportunists and the real experts looking out for our best interests. More importantly, it's about arming individuals with an arsenal of knowledge. Whether or not someone builds a debt pile because he takes the initiative and starts his own business is a known risk. One that Dave Cannon was genuinely exposed to in his finance classes. 

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