Time for Financial Education to Evolve

Pushing the Limits:

New NEFE-Funded Research Shows it is Time for Financial Education to Evolve

“Everyone agrees that the facts on financial-education delivery have changed. The obvious solution is that more education will solve this problem. However, meta-analytic evidence supports that there are limited knowledge gains in heap-structure teaching.”

This statement, made by John G. Lynch, Jr., Ph.D., of the University of Colorado-Boulder at NEFE’s 2013 Education Forum, surprised some experts and raised a question that others in the field have been dreading for years. What if “heaping on” more of the same types of financial education will not produce a change in behaviors? Or, even more alarming: What if financial education doesn’t work?

Lynch was prepared to ruffle a few feathers when NEFE approved his research proposal for funding. His team’s final report, The Effect of Financial Literacy and Financial Education on Downstream Financial Behaviors, summarized the results of a scientifically-robust review of research exploring the link between financial education, literacy, and behaviors.

For this investigation, Lynch and two other experts—Daniel Fernandes, Ph.D., of Erasmus University in the Netherlands and Richard G. Netemeyer, Ph.D., of the University of Virginia-Charlottesville—conducted a meta-analysis to compare findings from 201 studies of financial literacy and interventions that engaged 585,168 participants.

The researchers compared studies with different designs and different kinds of statistical analyses, all exploring the same core question: What is the connection between financial education, financial literacy, and the choices that people make about their finances?

This first-of-its-kind systematic meta-analysis, in tandem with three additional experiments, re-examined findings from earlier investigations. At the same time, it revealed information with important implications for successfully shaping financial behavior. Key findings from the research revealed:

The Amount and Timing of Financial Education Matters

Education that closely precedes a financial decision has more impact than interventions that occurred months or years prior. Because people tend to forget what they’ve learned over time, more education isn’t always better unless timed close to points of decision. Therefore, financial literacy is best achieved through lifelong learning and not just one-off interventions.

Financial Behaviors and Literacy as Measured to Date are Weakly Linked

Educational interventions and financial literacy as measured in the meta-analysis are linked only weakly to healthy financial behaviors—and appear to be less effective than financial literacy interventions in workplace education or career counseling.

Findings from Past Investigations Merit Revisiting

Different types of financial literacy studies have yielded more varied results than science would predict. Researchers question to what extent those differences stem from the need for better research designs and analyses. Specifically, the researchers found that prior studies of financial education may have failed to account for behavioral traits that correlate strongly with healthy financial decision making, regardless of interventions.

After completing the meta-analysis, Lynch and his fellow researchers conducted three additional studies to further explore the idea that these finance relevant traits—such as frugality, or comfort with numerical information—might be wild cards not properly accounted for in prior research.

In their final report, the researchers concluded that future financial education possibly could be more effective if it focused on teaching “soft skills like propensity to plan, confidence to be proactive, and willingness to take investment risks more than content knowledge about compound interest, bonds, etc.”

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