Financial Literacy is a Failure?

In recent weeks the writings of law professor Lauren Willis have become much more widely distributed, in part thanks to a short piece in Money magazine. (see: http://money.cnn.com/2008/08/25/pf/teaching_money.moneymag/index.htm)

Professor Willis has at least 2 law review articles suggesting in essence that the financial market is too complex for the average consumer and only prescriptive legislation regulating consumer financial products will prevent consumers from taking on higher risk or cost products than necessary.

One 2006 Maryland Law Review article is titled: Decisionmaking & the Limits of Disclosure: The Problem of Predatory Lending and another 2008 in the Iowa Law Review Against Financial Literacy Education. Those who toil on consumer education topics might find the titles alone a little alarming. The articles are worth a read and certainly are serving to provoke discussion.

A few points are worth remembering.

First, regulation and education are complements, not substitutes. Policymakers can, and in fact do, regulate the terms of some products while also supporting consumer education.

Second, from a legal scholar's point of view regulation provides an absolute and highly standardized way to present a solution to a social problem. Economists tend to a bit more skeptical--if there is consumer demand the market will develop a work around almost before the ink is dry on a new law. The markets evolve so fast product regulation is more like a game of whack-a-mole.

Third, Professor Willis is correct much of the data on financial education and disclosure shows non-significant effects, and when findings are significant, plagued by selection bias--that is the consumers most likely to get information are the most motivated and successful even in the absence of education or disclosure. But this points more to failures in research methods and design than in public policy. As a society we do seem to believe education has value; there is not reason to think education only works in certain domains. Moreover, some research is carefully done and shows financial literacy education and disclosures are effective at statistically significant levels. There is not enough research in the field (so says the researcher) on financial education and disclosures, and far too little research on how to deliver information to consumers or when the ideal times to do so might be.

Consumer decisions in financial markets are more complicated than in the past: for example defined pensions are now more likely to be consumer-directed retirement accounts and fixed rate mortgages now come in multiple adjustable rate flavors. Consumers have the capacity to navigate this marketplace without resorting to high cost advisers. Before throwing out the concept of consumer education maybe policymakers need to take a fresh look at what is being attempted and how it can be improved.