Mint Money

Why Financial Literacy Programs Fail

Apr 23, 2013 / By Mark Henricks / Comments0

Nobody is born knowing how to manage money.

From simple tasks like making a household budget or balancing a checkbook, to evaluating life
insurance and selecting an investment vehicle to fund a comfortable retirement, people have to
learn about personal finance in order to be successful overseers of their incomes and assets.

But mere knowledge of financial matters isnt enough. Nor is simply having greater raw
intelligence.

As a recent study by researchers from Harvard Business School, the Federal Reserve and
Wellesley College noted, having more financial literacy and cognitive capability does produce
better financial decisions, from savings to picking stocks.

Yet, there is little evidence that education intended to improve financial decision-making is
successful, the researchers wrote.

This doesnt necessarily mean that understanding finance doesnt make you a better personal
financial manager.

Indeed, another recent study, this one of households in the United Kingdom, found that people
with lower financial literacy were more likely to take out payday loans and have other high-
interest consumer loans than those with more financial literacy.
Low-literacy individuals didnt show as much understanding of credit terms. They are also less
likely to engage in behavior which might help them to improve their awareness of the credit
market, the researchers wrote in the February 2013 issue of the Journal of Banking and Finance.

Why Financial Literacy Education Fails

So the question is not whether knowing about finance doesnt help, but whetherteaching people
about finance helps.

This question is highly relevant in the wake of the recent financial crisis, as noted in a paper
Canadian researchers published in a recent edition of the Journal of Education Policy, because
governments have increasingly embraced financial literacy education as a potential way to avoid
future debacles.

Unfortunately, according to these researchers, the popularity of state-mandated personal

financial education is based more on politics than evidence.

Why doesnt financial literacy education necessarily make us better personal financial managers?

One reason is that peoples emotional and psychological relationship with money is as powerful
or more powerful than their intellectual grasp of how to manage it wisely.

The study of this relationship is called behavioral finance. It tries to explain why, even when we
know better, we make bad financial decisions.

So, What Does Work?

Of course, while knowing why we make bad decisions is interesting, it would be a lot more
interesting to learn what, besides formal personal financial education, could help us be smarter
about money.

Recent research from South Africa suggests one possibility: Rather than making us sit in
classrooms listening to lectures about the effects of compound interest, embed financial
messages in soap operas.

The South African researchers examined behavior of people after watching two different
television shows about leading characters who gamble, buy items on installment plans and wind
up deeply in debt.

One show featured messages about financial literacy while the other did not. Watchers of shows
without messages were more likely to make bad financial decisions.

A less-entertaining conclusion was reached by the Harvard, Wellesley and Federal Reserve
researchers.
Looking at evidence of effects of personal finance and mathematics courses some states require
for high school graduation, these researchers found that, while finance courses did not lead
people to make better financial decisions, math courses did.

Former math students, they found, declared bankruptcy less often and had fewer foreclosures.

This subject is likely to generate much more study, given the concern about consumers role in
avoiding future financial debacles. But for now the conclusion seems to be that we should do our
math homework, and then relax in front of the TV to watch a show about a good money manager.

Mark Henricks reports on finance, business, technology and other topics from Austin, Texas. He
is the author of Not Just A Living: The Complete Guide to Creating a Business that Gives You A
Life and other books. Visit him online or on Twitter@markhenricks.
 TIMES OF INDIA
Financial literacy may become part of school curriculum
TNN Jul 17, 2012, 04.31AM IST

MUMBAI: With household savings rate in the high 30s and investments in financial
products in single digits, for long India has been facing the challenge of converting
savings into financial investments. And a large part of the savings is locked in gold, real
estate and bank fixed deposits. One of the solutions, market practitioners said, was to
make people literate about all the aspects related to investments. Financial Stability and
Development Council (FSDC), the inter-regulatory body under the ministry of finance,
has now proposed that basic financial education be included in school curriculum till
Class XII. This has also been prompted by the need for inclusive growth.

The draft report by FSDC, titled National Strategy for Financial Education, has proposed
that a group - with representatives from HRD and finance ministries, CBSE, NCERT,
RBI, SEBI, IRDA and other regulators - oversee the proposed financial literacy
campaign. It has also proposed that the HRD ministry, with the help of the finance
ministry, should "take the lead in ensuring inclusion of financial literacy material in
school curriculum across India". In a concept papers presented a few years ago as the
chairman of UTI Mutual Fund, U K Sinha, the current SEBI chairman, had proposed to
include a financial education course in school curriculum. FSDC, the body that published
the paper, includes SEBI.

The NSFE has been prepared with three main objectives - to create awareness and
educate consumers on access to financial services, availability of various types of
products and their features, to change attitudes to translate knowledge into behaviour,
and to make consumers understand their rights and responsibilities as clients of
financial services. "Given the fact that India has a large population, a fast-growing
economy with national focus on inclusive growth and an urgent need to develop a
vibrant and stable financial system, it is all the more necessary to quickly formulate and
implement a national strategy," the report said. It has set a five-year time frame to
implement the plan that aims to reach out to 500 million people.

The plan envisages basic financial education at the first stage, which in subsequent
stages will move up to making people aware about the various sectors (stock markets,
mutual funds, insurance), and then about various products within those sectors. The
report said that stocks exchanges, banks, mutual funds, insurance companies, industry
associations and trade bodies, all have to play important role in the whole campaign.
 Times of India

XLRI launches financial literacy initiative for villagers

TNN Jul 7, 2013, 11.39AM IST

MUMBAI: XLRI, the premier B-School in India, has started a financial

literacy programme among the unbanked population in adjoining villages across east
and west Singhbhum districts through a newly launched project called 'Sanchetana' and
inaugurated the 'Financial Literacy on Wheels' initiative at Jamshedpur, in association
with a nationalised bank.

The objective of the initiative under the Sanchetna project is to spread awareness of
savings, insurance and old age pension among the villagers and urban poor, coming
closer to their homes. The student teams from XLRI would visit various public centres in
remote villages to meetings and festivals, schools, community associations, etc to spread
financial literacy using various forms of audio visual documents in villages in and around
the district.

The project aims to educate the rural people on banking and investment options. XLRI
students, research scholars and professors are organizing sessions with villagers, while,
the bank, State Bank of India, is assisting them by bringing the rural populace under the
fold of conventional banking. The project was piloted at Saldih in Gamharia, located
about 12km from the city, from May onwards. A number of sessions have been held at
gram sabhas, schools, and self-help groups for women and one-to-one interactions with
villagers have yielded encouraging results. The volunteers from XLRI are also
conducting counselling sessions with rural high school students so that they learn the
concept of saving early on.

HK Pradhan, Professor of Finance and Chief Mentor of 'Sanchetana' initiatives said on

the occasion, "Financial literacy is an irreducible need for everyone. Low-income and
vulnerable consumers are not necessarily less financially literate than wealthier
consumers. With this initiative, we intend to spread such awareness and make people
conscious about their financial decisions."