Making Financial Decisions Is Hard, Overcoming Barriers
Making Financial Decisions Is Hard, Overcoming Barriers
By Philip Fernbach & Abigail Sussman Market Watch
Teaching people about money doesn’t seem to make them any smarter about money – here’s what might
Making financial decisions is hard, but three promising ideas are helping Americans overcome barriers. If the average American went in for a financial checkup, he or she might get rushed to the emergency room. Forty-four percent of us can’t cover a $400 out-of-pocket expense, and 52% of American households have no retirement savings. We seem to be chronically poor at making financial decisions. We commit costly mistakes across all areas of personal finance including decisions about savings, investing, budgeting and borrowing.
Diagnosing the problem is easy: We make mistakes because financial decision making is hard, and we lack an understanding of the decisions we face. Finding a cure is much more difficult. To many, the obvious treatment is financial education, but recent research suggests that financial education is not effective.
Some promising new ideas such as “just-in-time” education and “nudges” to help us make better decisions are starting to emerge as alternative approaches.
Ineffective Programs
Governments around the world have invested huge resources in initiatives aimed at improving financial literacy, such as the Federal Deposit Insurance Corp.’s My Smart program, which helps low-income individuals develop financial skills.
Unfortunately, research into the effectiveness of these programs paints a grim picture. A recent meta-analysis looked at every known study examining whether a financial-education intervention — such as training sessions, classes or one-on-one counseling — improves positive financial behaviors and financial health. Across all those studies, there was almost no benefit. Those participating in financial education were essentially no better off.
If we want to come up with better solutions, we need to understand the psychological barriers to financial education. Why is it so hard for people to learn?
Challenges To Learning
The first reason is relevance. The mind is not like a computer that can store arbitrary amounts of information. Instead, we tend to retain only what is useful for navigating our current circumstances.
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