Critics of financial education raise a number of valid concerns. But their main argument typically reduces to this: you can teach people about financial concepts, but acquiring this knowledge rarely changes their financial behavior. In other words those who, say, master the concept of compound growth are no more likely to take advantage of their understanding and save early for retirement, as you might expect. If you can’t change money behavior, what’s the point?
This argument, supported in academic research, has given rise to the idea of just-in-time financial education—a fairly new term that strikes me as a close cousin, or perhaps even successor, to an older idea called point-of-sale advice. The theory is that people learn best—and make better decisions—when they get information just as they are about to make a money decision.
The National Endowment for Financial Education, in a report, concluded “just-in-time financial information must be available throughout each stage of life so individuals can acquire knowledge and change behavior during points in their lives when they are motivated to change.”
A new and widely read study from three business school professors—Daniel Fernandes of Erasmus University in the Netherlands and the Catholic University of Portugal, John G. Lynch of the University of Colorado and Richard Netemeyer of the University of Virginia—showed the “decay of effects of financial education” over time and implied that “content knowledge may be better conveyed via just-in-time financial education tied to a particular decision.”
In a recent blog for the The New York Times, behavioral economist Richard Thaler wrote, “We shouldn’t fool ourselves into thinking that adding a household finance class to a high school curriculum will in itself create knowledgeable consumers who can understand today’s wide array of financial products.”
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His conclusion prompted retirement and actuarial expert Alicia Munnell, director of the Center for Retirement Research at Boston College, to jump on the theme, saying in a blog on Marketwatch.com:
For those of us interested in retirement security, the message is clear. People need a simple system… In the 401(k) arena, employees need to be auto-enrolled; they need auto-escalation in their default contribution rate; they need clear guidance that they and their employer should be putting aside a total amount of about 15%; they should be enrolled in low-fee target-date funds; and they need very simple mechanisms for withdrawal. Given the state of play, better design of retirement systems seems like it will trump education every time.
So there is a lot of academic weight behind this idea that we are better off reaching consumers with information and advice just in time—before they do something stupid—than in the classroom, where they may or may not learn to hold on to important personal finance concepts and be able to think for themselves.
What the critics don’t say, though, is that the just-in-time approach is highly problematic. How do you reach someone just as they are about to tap a button on their iPad and purchase something they don’t need and can’t afford? What might just in time mean in the context of retirement saving? There is no just in time. You need to start saving now and never stop. Just in time implies you can reach them with useful information as they turn 65.
The time to learn about mortgages is not when you are sitting down with the paperwork and suddenly find you have chosen a home that is too expensive. By then you are apt to be persuaded to stretch beyond prudence. The time is when you first start to dream and need to understand how much house you can afford. “Should we put electrodes in their head?” asks Annamaria Lusardi, professor of economics and accountancy at the George Washington School of Business.
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We don’t teach Shakespeare just before you pick up a novel. Why must financial education be so different? Why not simply teach it, like literature, from grades K-12? Maybe then we’d need fewer just-in-time interventions.
Speaking to a group of bankers this week, Richard Cordray, director of the Consumer Financial Protection Bureau, gave a nod to this view. “As the financial marketplace has grown more complex, we have made an enormous mistake in this country by not placing a consistent and sustained emphasis on financial education,” he said. “Every year, we send thousands of young people out into the world to survive on their own, with little or no training in the kinds of decisions they must make to succeed financially.”
Cordray called this a “self-defeating approach” in a free market economy, and said we need to “recognize that the best form of consumer protection is self-protection.” As a key regulator, Cordray is erecting consumer safeguards like simpler mortgages and student loans to help protect borrowers from their worst instincts. But he’s also pushing financial education in schools—and given the growing voice of critics, he may be just in time.