Against Financial Literacy Education

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AgainstFinancial Literacy Education

• Lauren E. Willis
• Visiting Associate Professor,
• University of Pennsylvania Law School
• Associate Professor, Loyola Law School Los Angeles

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• Regulatory model
• Disclosure Choice
• Today, necessary corollary
• Financial Literacy Education
• New model
• Regulation through Education

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• Financial literacy provides the foundation to
  build wealth and fully participate in the
  economy. By understanding basic financial
  principles and putting them to use, you can be on
  the road to improving the lives of your household
  and your community
• NAACP Financial Empowerment Guide
• There needs to be financial education measures
  in place.
• President George W. Bush, regarding
  foreclosure rates in 2007

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Financial Literacy Education Model
financial education ? financial literacy
knowledge, skills, motivation Goldilocks
confidence ? good financial behavior
decisions actions our society/market
requires ? good financial outcomes
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Methodological problems with studies that claim
to demonstrate effectiveness
Does Financial Literacy Education Work?

• unreliable data surveys, self-assessments
• incomplete data low response rate, response bias
• confounding variables assistance, intervention
• inadequate controls self-selection, attrition
  bias
• small samples
• results lacking statistical significance
• short time horizons same day, 3 months

Financially literate less profitable, but
financial services industry still supports
financial literacy education
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Is Financial Literacy Education Likely to Work?

• Information asymmetries moving targets -
  consumer financial decisions are episodic
• Knowledge, comprehension skill limits -
  rules of thumb do not work
• Disparity in ability to reach consumers at
  teachable, vulnerable moments

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Is Financial Literacy Education Likely to Work?

• Triggers for Biases
• Overwhelming information choices
• High stakes
• Discomforting thoughts
• Uncertainty the future
• Opaque attributes incommensurable tradeoffs
  cant Just Say No

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Is Financial Literacy Education Likely to Work?

• Information asymmetries moving targets
• Knowledge, comprehension skill limits
• Disparity in ability to reach consumers at
  teachable, vulnerable moments

• Overwhelming information choices
• High stakes
• Discomforting thoughts
• Uncertainty the future
• Opaque attributes incommensurable tradeoffs

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The Costs of the Education Model

• Time, expense inefficient division of labor
• Diversion from effective policymaking
  trying to fix the consumer instead of the law
• Paradoxical effects on decisionmaking
  overconfidence, lulling effect
• Blaming the consumer Dont borrow trouble

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Alternative Public Policies

• Consumer decisionmaking education
• Substantive product regulation
• True transparency
• Aligned incentives
• Products liability
• Welfare-enhancing defaults
• Self-control devices
• Affordable expert advice

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AgainstFinancial Literacy Education

• Lauren E. Willis
• Visiting Associate Professor,
• University of Pennsylvania Law School
• Associate Professor, Loyola Law School Los Angeles