Financial education: searching for key ingredients13 Feb 2017
People often make mistakes when managing their finances and choosing investments. Recently, economists have focussed on how financial education may help to improve decision making. A range of different financial education interventions have been tried and tested. Still, there is no perfect recipe. The perfect recipe may remain elusive, but, perhaps, we could identify the key ingredients. This blog post searches through recent literature reviews to find the key ingredients.
I focus on three literature reviews, or meta-analyses:
- Daniel Fernandes, John Lynch Jr. and Richard Netemeyer (2014) Financial Literacy, Financial Education and Downstream Financial Behaviors Management Science
- Margaret Miller, Julia Reichelstein, Christian Salas and Bilal Zia (2015) Can You Help Someone Become Financially Capable? A Meta-Analysis of the Literature The World Bank Research Observer
- Justine Hastings, Brigitte Madrian and William Skimmyhorn (2013) Financial Literacy, Financial Education and Economic Outcomes Annual Review of Economics
The evidence is bleak. Financial education has tiny impacts on behavior. Part of the problem is that there is such a wide range of interventions that comparison proves challenging. The above-mentioned surveys are comprehensive, but they struggle to extract strong insights on what makes for a successful intervention.
One recommendation is for “just-in-time” interventions. Financial education decays over time (Fernandes et al, 2014), so interventions are most effective when applied immediately. Also, if the intervention relates to a decision that can be acted upon, the intervention has a stronger effect. Fernandes et al (2014) clarify when just-in-time interventions are likely to be most effective:
Arguably, both just-in-time financial education and nudges have more potential in redressing financial errors that are associated with very infrequent decisions, whose timing can be predicted by consumers and those trying to help them. If a mistake comes from an infrequent but legal behavior and the consumer cannot anticipate the occasion, cooling off laws are an appropriate remedy.
Miller et al’s (2015) review provides further support for just-in-time interventions. They highlight the study by Agarwal, Amromin, Ben-David, Chomsisengphet and Evanoff (2010), which allowed participants to apply relevant information immediately.
A second, but weaker, recommendation is to teach rules-of-thumb. Drexler, Fishcher and Schoar (2014) found that rules-of-thumb were more effective than teaching all the details. However, there are no studies that tackle this question in other settings.
I am both excited and disappointed after reading these survey articles. Excited, because there are many open questions regarding financial education and disappointed, because there is no clear answer as to what makes for well-designed financial education intervention. There is no perfect recipe and we don’t even know the key ingredients!