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Financial Literacy Does Not Matter to Financial Behavior

And Why I Repeat Myself

This study's findings did not surprise me.  People do not act on financial education and what little they learn, they forget. Why is that?

They don't say in the study, but I have two hunches. 

First, I think financial marketing overwhelms financial literacy attempts.  Financial marketing is repetitive and is aimed at behaviors for their profit.

Second, I don't think people really learn from financial education.  Teaching and learning are two different things. And frankly a lot of financial education is theory that does not reflect reality.

When I was taking a capstone business course in college, the senior class was divided into teams to run a computer simulated company and make some key financial decisions up front.  The other finance student on my team and I argued over two key decisions.  I did deep research and ran calculations based on how the stimulation was going to play out and determined for the two key decisions there was only one correct answer.  The other finance student was shooting from the hip and had no justifications - basically wanted a compromise answer.  I did not relent and our company went on to have the highest profits in the simulation run and our team was one of two teams to get A's.

I found the same shoot-from-the-hip attitude in the marketing capstone course.  With only two other not-so-interested team members, I co-opted the decision making on research and marketing decisions was able to double the profits of the second place team (12 teams) in a simulated three years of business.  The second place team had simply copied what I did half way through the class. The professor asked me how the stimulation game worked and had me talk to her two classes at the end of the semster.  Some students still argued with me on what were the right decisions.

In my discussions with other business majors in college, I found generally there was a lot of shooting-from-the-hip or this-seems-about-right decision making when it came time to apply what they were taught. It was as if they had not really learned anything from all their time sitting in class.  So yes, financial education does not seem to change behaviors.  People keep doing what they "feel" is right.  Even finance majors.

Many financial advisers are taught by their companies what to tell clients in order to set up their portfolios.  There is a lot of theory and marketing packaged in these decisions that tend to help generate fees for the company.  It is not all bad since many people would take on way too much risk otherwise, but few advisers recommend exiting the market and tend to shift allocations around. At some point in time this is like shifting chairs to higher ground on the titanic when you should be jumping in the life boats.


Policy makers have embraced financial education as a necessary antidote to the increasing complexity of consumers’ financial decisions over the last generation. We conduct a meta-analysis of the relationship of financial literacy and of financial education to financial behaviors in 168 papers covering 201 prior studies. We find that interventions to improve financial literacy explain only 0.1% of the variance in financial behaviors studied, with weaker effects in low-income samples. Like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention. Correlational studies that measure financial literacy find stronger associations with financial behaviors. We conduct three empirical studies and we find that the partial effects of financial literacy diminish dramatically when one controls for psychological traits that have been omitted in prior research or when one uses an instrument for financial literacy to control for omitted variables. Financial education as studied to date has serious limitations that have been masked by the apparently larger effects in correlational studies. We envisage a reduced role for financial education that is not elaborated or acted upon soon afterward. We suggest a real but narrower role for “just in time” financial education tied to specific behaviors it intends to help. We conclude with a discussion of the characteristics of behaviors that might affect the policy maker’s mix of financial education, choice architecture, and regulation as tools to help consumer financial behavior.

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