At the epicenter of the housing crisis was a black hole of financial literacy–masses of consumers making calculations with unrealistic mathematical expectations. To avert another capitalist catastrophe, 300 British MPs are calling for mandatory personal finance education. Unfortunately, molding smart consumers is easier said than done, as no curriculum to-date has been certified as effective by economists. The education must start young, focus on psychology, and engage technology.
“We are bombarded with mobile phone tariffs, direct debits, standing orders and complicated deals,” Justin Tomlinson told the BBC–he’s a British MP heading up the “Financial Education for Young People” group. Today, the British education system is a haphazard mix of voluntary and compulsory programs, and there is no across-the-board standard to ensure a basic understanding of personal finance.
This lack of education, both in Britain and America, has led to dismal levels of financial literacy. According to a Brookings Institute report, among individuals aged over 50, only half could answer this question:
“Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow: more than $102, exactly $102, less than $102.”
Yet another survey found that one in five Americans believed that “the most practical strategy for accumulating several hundred thousand dollars” for their retirement was the lottery.
Given the deep-seeded ignorance of the average consumer, is the arm of public education long enough to pull them out?
Is education the answer? Maybe. The Brookings report notes, “None of the four traditional approaches to financial literacy–employer-based, school-based, credit counseling, or community-based–has generated strong evidence that financial literacy efforts have had positive and substantial impacts.”
Yet, a ray of academic sunlight suggests that states with mandatory and specific education requirements do show signs of success. Programs may fail if they address illiteracy too late in life or if they are only a single semester long.
Part of the assumed importance of starting young, by baiting children with the of adorableness of a piggy bank, is to ingrain responsible behavior. Financial muck-ups are more than just a failure of arithmetic, but of suppressing the urge to overspend (do we really need the iPad 2?) and calmly evaluating risk. Thus, throwing equations of compound interest at 18-year-olds may already be too late.
Technology can help
The Girlscouts have a storied history of teaching entrepreneurship from peddling one of the most addictive uncontrolled substances known to man: cookies. The annual drive got a 21st century reboot, when a troop in Silicon Valley incorporated the smartphone credit card system, Square. The ingenuity and subsequent sales spike led Facebook Consumer Marketing Director Randi Zuckerberg to tweet, “Some very smart, enterprising Girl Scouts are at Facebook HQ w/boxes of cookies & @square devices. Making SERIOUS bank.”
Likewise, Washington University professor of managerial economics Lewis Mandell, tells the Economist that out of the vast wasteland of failed financial literacy courses, real-life stock trading games are one of the most promising. And, these games can start early: the entering class of Chicago’s K-8 Ariel Community Academy, is endowed with $20,000 of actual money (and profits go to college assistance). Time reports that sometimes they end up with less than they start, a hard lesson that may, in fact, be more valuable in the long run.
Ultimately, mandatory education may work, but its going to be difficult, and will require a lot of imagination.