Financial literacy is a sham
The story goes that if we take responsibility for our finances, save more, not go over the top with our spending, invest wisely and patiently, we’ll achieve financial freedom and many other cherished outcomes. We can move out of this dilapidated apartment and into that house in the suburb that we have always wanted, we can repay our never ending student loans, we can not have the credit cards always maxed out, we can stop worrying about money at the end of the month. Our future will be bright if only we can make better financial decisions. Our path to salvation goes via financial literacy. Or so we are told by large financial services companies like Charles Schwab and Robinhood as well as multiple influencers all over social media like YouTube.
It doesn’t work
Financial literacy is problematic not least because it just doesn’t work. In fact, a 2014 meta-analysis of 169 papers and 201 studies, found that “interventions to improve financial literacy explain only 0.1% of the variance in financial behaviors studied”. And that low-income students had even weaker correlations. More recently, a 2021 article by law professor Lauren Willis concluded that “financial education does not demonstrably improve financial well-being”. In other words, the problem with financial education is that it doesn’t work.
The key reason why financial literacy doesn’t really work is because changing behaviour is hard. Timothy Ogden, writing in the Washington Post says that “giving people information does not, by itself, change how they act is most firmly established in social science, whether the subject is the dangers of drug use, the value of getting vaccinated or the calories in a restaurant’s bacon cheeseburger. The same is true of finance.”
Conflict of interest
The other problem with financial literacy is of course conflict of interest. The personal finance industry is famously rife with it. When Robinhood, a company which earns money when retail investors trade options and cryptocurrency on its platform, says that “the sooner you invest, the longer you give your money the chance to grow”, it is problematic to say the least. The sooner I start buying out of money call options and dogecoins on Robinhood’s platform, the longer Robinhood has to earn money from my trades. The more I trade and the longer I trade, the more valuable it is for the platform. That is not hard to fathom.
Financial literacy as content marketing
Yet another, and a bit more subtle form of conflict of interest props up when financial services companies use financial literacy campaigns to promote their brand. When Charles Schwab promotes an education campaign under its branding and by its employees, then we should take a pause and think about it. The company recently launched Moneywise America which is an ambitious program “making free financial education available to every school and community in the United States.” However, the content of this program is copyrighted, carries the company’s branding and is taught by the company’s employees. And Charles Schwab is not the only one.
Financial Times, the newspaper, recently started a financial literacy charity where they claim that such education “can make a vast difference” and “can be transformative for individuals and families.” Of course, it carries the company’s branding and is helmed by its employees. The thing to note here is that such initiatives, first and foremost, promote the companies’ brand and create awareness about their services. That it comes in the guise of financial literacy is a bit meh.
Everything is expensive
A third issue here is that many financial problems that we face in our personal lives today are structural. That is, the costs have gone a lot and income has not kept pace. Costs like healthcare, housing, education have risen substantially and incomes have not kept pace. No amount of financial literacy can help reverse that. In fact, financial literacy makes it worse because it makes us believe that our financial wellness is only dependent on what we do and not all dependent on what is happening in the environment around us. The financial education taught by these companies, as Felix Salmon puts it, “tends to reinforce a libertarian view of financial wellness, that poverty and debt are less a societal problem and more a consequence of bad individual financial decisions”, which is problematic.
Finally, we must also be mindful of consuming financial education or advice from various social media, including YouTube, because financial literacy is not really useful as behaviour is hard to change and what is available and popular may be rife with conflict of interest that is not very obvious all the time. How is this video any different from any other influencer video out there? Apart from the fact that this channel is yet to get much viewership or any viewership, there is not much difference. Being skeptical is a good idea when it comes to financial advice and financial literacy.