Business Strategy | Financial Planning

The problem with financial literacy? You keep calling me illiterate

Have we been screwing up this financial literacy thing all along?   For years now, CPAs have been part of a national movement to boost the financial smarts of Americans everywhere. The problem is obvious: Study after study shows that Americans aren’t saving enough for retirement. The answer, obviously, is to give them the information they need to make smart financial decisions.   It makes perfect sense. And it might be completely wrong.   I’m reading a fascinating book called Mindwise: How We Understand What Others Think, Believe, Feel, and Want, by Nicholas Epley. In it, he explores the most effective ways to get people to change their behavior.   “Common sense suggests targeting people’s minds to change their actions,” Epley writes. For example: Financially challenged folks are making poor choices? Roll out a financial literacy program to make them smarter.   But these types of solutions are often useless, Epley argues, because they frequently misunderstand the cause of the problems.   Taken verbatim from Mindwise:    “One common theory about poverty explains it in the language of mental deficiencies: The poor are simply not as smart as the rest of us, and they do stupid things with their money that keep them poor. What’s the fix? A common strategy is to roll out financial literacy classes to teach the poor to be smarter. The problem? Those classes seem to help the poor very little.   “The reason may be that the poor turn out to be smarter and more informed about money than these policies imply. In one set of experiments, psychologists found that poor people make fewer mistakes on financial problems that routinely trip up the wealthy.   “One of the bigger problems is the lack of trust in financial institutions that is rampant in poor communities, which is compounded by the lack of access to simple banking services like savings accounts. The poor take out payday loans in part because they don’t have other banking services they can rely on. One effective way to help break the chronic debt trap is to give the poor access to banking services.   “Poverty will not yield to simple solutions like this alone, of course, but it’s unlikely to yield at all using assumptions that poverty is largely the product of stupidity.”   Maybe the problem is that word — literacy. If you’re not saving enough for retirement, does that make you financially illiterate?   Of course not. Maybe you simply don’t have access to the resources you need to save enough for retirement. Maybe you can’t get a savings account. Maybe you can’t afford a financial planner. Maybe you know exactly what you should be doing, but you simply can’t afford to do it.   Too often, our problem is our own assumptions. We assume we know what the problem is. We don’t. We’re illiterate in our own right.   Part of the solution is admitting that our assumptions about why people act the way they do might be wrong. That we don’t know nearly as much as we think we do. That there are always other forces at play.   A little financial literacy never hurt. Just remember that your audience might not be illiterate in the first place.


Bill Sheridan