The Fallacy of Financial Education

In White House Burning, there is a section on the rise and political influence of the conservative media. At one point, I looked up the top ten talk radio shows by audience. Nine of them were unabashedly right-wing, politically oriented shows. The tenth was Dave Ramsey. Ramsey has plenty of conservative elements: religion, moralism, glorification of wealth. But his show isn’t about conservative politics. It’s about personal finance.

Ramsey is a huge success because—in addition to his charisma and marketing skills—he is peddling one of the huge but popular illusions of American culture: that people can become rich by making better financial decisions. He’s also one of the characters skewered by Helaine Olen in her recent book, Pound Foolish, which describes the fallacies, hypocrisies, and borderline-corrupt schemes of personal finance gurus like Ramsey and Suze Orman. It’s a fun read—a bit repetitive, but that’s largely because all personal finance “experts” are pushing a small handful of myths.*

The “sham” of the financial literacy movement—the idea that all of our financial problems would be solved if Americans were better educated about money—is the subject of Olen’s article in Pacific Standard. More than a dozen states require personal finance classes in high school, even though the evidence is that they have no impact. In short, people who consume financial education behave no differently from people who don’t.

There is a whole hierarchy of reasons for this. One is that people tend to forget what they learn in class—no matter what class you’re talking about. One is that at the moment of making the financial decision—say, to take out the subprime mortgage—anything they may remember from class is overwhelmed by the sales pitch of the mortgage broker sitting in front of them. One is that people make financial decisions on irrational grounds.

There are a couple of structural reasons, as well. Financial education content has to come from somewhere—and overwhelmingly it comes from the asset management industry itself, which has the incentive to teach people many of the wrong things. Financial education courses are often designed by financial institutions themselves; financial “education” available on the Internet is even more likely to be a type of marketing above all else.

Beyond that, it’s not even clear—to me, at least—that there is a scientific basis of agreement on how people should make financial decisions. Sure, there are some obvious things that any informed expert should know: buy index funds (for liquid, near-efficient markets) and minimize fees, for example. But when it comes to asset allocation, for example, there are reputable people like Ian Ayres who say that young people should invest more than 100% of their assets in the stock market, and reputable people like Zvi Bodie who say that the minimum amount of money you need for retirement should be invested in inflation-indexed Treasuries. Similarly, you could get a spectrum of reasonable opinions on the wisdom of taking out loans to go to college. (Up to a point, most of the opinion would be in favor because of the expected earnings boost you get from education, but it depends on a lot of factors like where you go to college, what you study, etc.).

Olen’s book shows in entertaining detail that the way most financial education is done is a joke. (Ramsey, for example, advises people to pay down their debt in increasing order by principal amount—not descending order by interest rate, which is obviously better from an, um, financial perspective.) But it’s not clear to me how much of it could even be done right. The bottom line is that it’s no panacea—not for poor financial decision-making, let alone for the income inequality and threadbare safety net that are the underlying cause of most serious personal financial problems.

* I’m about a third of the way through at this point. I only read it during Tuesday morning “family reading” with my daughter at school. She sits next to me and reads historical fiction.