23  Education

Through this book we have seen substantial evidence that those with higher financial literacy have higher financial wellbeing and better outcomes for many financial decisions.

However, that link in itself does not mean that: - there is a causal relationship between financial literacy and wellbeing - interventions to increase financial literacy will do so - any increase in financial literacy will translate into higher financial wellbeing.

These points are the subject of a substantial debate.

23.1 The case against financial education

The case against financial education is laid out by Fernandes et al. (2014) who examined 201 previous studies and found that financial education explained only 0.1% of variation in the financial behaviours studied. Further, the minor effect of the financial education decayed with time, having negligible effects 20 months after the intervention.

Fernandes et al. also found that when they controlled for other psychological traits of consumers (such as propensity to plan, willingness to take financial risks, and numeracy), the effect of financial literacy diminish dramatically. As a result it may be other traits that are driving the observed effects

Finally, they noted that few studies explicitly seek a causal effect, rather than just correlational. Financial literacy effects are far smaller when manipulated rather than measured.

23.2 The case for financial education

A more recent paper by Kaiser et al. (2021) pushes back at this interpretation of the evidence.

Their paper had the benefit of more recent studies, with the number of randomised controlled trials that they could draw on having grown from 13 to 76 since Fernandes and colleagues’ meta-analysis. Adding that new work increased the effect three to five times (depending on methodology) from that found by Fernandes.

Kaiser et al. were also critical of the use of “variance explained” measure to describe the effect of financial literacy, arguing that it can hide materials effects. Using alternative measures more common in the meta-analysis literature, they find that financial literacy interventions have an average 0.1 standard deviation effect on financial behaviours and 0.2 standard deviation effect on financial knowledge. This is similar to many math and reading interventions (although it should be noted there is a similar debate playing out across the broader education field).

Ultimately, Kaiser et al. argue that it is actually a comparison of the economic costs and benefits that are required. This was seldom done in the papers that they examined, but they did argue that they could be meaningful.

They also suggest that there are not enough long-term studies investigating decay to make any definitive statements about whether it occurs. If we were to draw evidence from the broader education literature, however, we would expect to see large decay.

23.3 Just-in-time financial education

One area where there is substantial evidence in favour of financial education involves interventions that are provided “just-in-time”. These are interventions designed to affect a decision or behaviour at an important moment. By their nature, they are less subject to decay and do not require the consumer to retrieve and apply financial knowledge from much earlier education.

We have covered one such example with Bertrand and Morse’s interventions to decrease payday lending use. By providing simple information at a critical moment, they were able to shift behaviours in the short-term, with potential longer-term benefits.