An article in this week's
Economist discussing the meager results achieved by financial education programmes.
The Economist's article starts
: "Here is a test. Suppose you had $100 in a savings account that paid an interest rate of 2% a year. If you leave the money in the account, how much would you have accumulated after five years: more than $102, exactly $102, or less than $102?...A survey found that only half of Americans aged over 50 gave the correct answer. If so many people are mathematically challenged, it is hardly surprising that they struggle to deal with the small print of mortgage and insurance contracts."
The majority of people who could not answer the question correctly were probably mathematically not competent. That said, there may have been some who were looking for an answer that was not there. For instance, no mention is made of bank fees and charges.
But is it valid to suggest: "If so many people are mathematically challenged, it is hardly surprising that they struggle to deal with the small print of mortgage and insurance contracts"?
The small print is, by definition, a struggle.
How is making the text smaller going to make it easier to read? Many intelligent, literate people struggle with the small print and the voluminous terms of contracts. They are not prepared to invest the cost (in terms of time and effort) to understand the fine print.
And let's face it, if you did read the fine print and disagreed with a particular clause, what ability would you have renegotiate the contract and sign an amended version? Instead, people use proxies, such as the brand and reputation of the provider, what their friends and their communities are doing. If there were a problem, these proxies will point it out.
Is it about intellect anyway? Even large organisations who had the incentives to read the fine print and could do their sums, failed to read it when they invested in securitised mortgages. Most people failed to understand the implications of the bigger picture* and many of these were not in the "stupid" category (see
The Big Short by Michael Lewis gives an entertaining explanation of what happened).
Financial education is more than acquiring knowledge about products and the ability to manipulate data mathematically. It isn't really about finance at all, but about behaviour, habits, heuristics and the recognition of arbitrage and opportunity.
Knowledge that credit card borrowing is an expensive form of debt and that "rewards" are an illusion (you are rewarding yourself with your own money) do not muscle up to the real opponent: that same person's inability to delay gratification.
Likewise, knowledge that a lottery ticket and a leaf are merely different versions of wood, does not prevent day-dreaming how you will spend the money when you get it and dissipating your effort to achieve more realistic ways to make money.
Financial education comes with practice and learning from mistakes, some of which are financial and some which are not. It comes from understanding behaviour, both your own and others. It comes from the ability to ask questions to cut through the guff that accompanies the sale of financial products. Acquiring the principles and practices that will help you not to get wiped out. A mathematical calculation is a useful aspect, but only a small aspect of what is required.
*
Including me.