Everywhere you turn these days, some bigwig policymaker is talking about the importance of financial literacy education. Here's Ben Bernanke doing it. And there's Tim Geithner and Arne Duncan. Even the President. It's easy to understand why we feel like we need this, what with all the bad financial decision-making of recent years. The only problem is, there's a fair amount of evidence that a lot of what we do to teach better financial habits, like courses in high school, doesn't work. Some research has shown that financial education is more likely to stick if it's focused on one topic and comes right before a person makes a related decision—learning about mortgages as you're house shopping, say, or getting a lesson in compounding interest along with your credit card.
But maybe there's a simpler approach. Maybe we should ignore real-world complexity altogether and just teach people financial rules of thumb.
A presentation at that microfinance conference last week got me going on this train of thought (although I'm by no means the first to ride it). In this experiment, researchers taught one group of small-time entrepreneurs in the Dominican Republic formal accounting, including double-entry bookkeeping, cash and working capital management and investment decision-making. Another group was taught simple rules of thumb, like "keep personal and business accounts separate" and "write everything down." The results:
People who were offered rule-of-thumb based training showed significant improvements in the way they managed their finances as a result of the training relative to the control group which was not offered training. They were more likely to keep accounting records, calculate monthly revenues and separate their books for the business and the home. Improvements along these dimensions are on the order of a 10% increase. In contrast, we did not find any significant changes for the people in the basic accounting training. It appears that in this context, the rule-of-thumb training is more likely to be implemented by the clients than the basic accounting training.
When I caught up with Greg Fischer to ask what the U.S. consumer-class take-away might be, he was appropriately modest about his findings and hesitated to draw any universal conclusions. I lack such compunction, so let me say that I think this result contains a very important piece of wisdom. People live complicated, busy lives and the learning they are most likely to put to use is that which is simple to remember and implement. In Fischer's study, some microentrepreneurs received follow-up training at their place of business: an educator stopped by to reinforce concepts and to answer questions. Once this happened, the group that received the formal accounting training applied what they had learned. But unless we want to set up a system in which your high school consumer finance teacher pops back up just in time for your first mortgage, rules of thumb might be the way to go.
And, actually, we already have many them. We just need to dig them out of the dustbin we tossed them into during the free-money euphoria. For example, don't spend more than 2 1/2 times your annual salary on a house. And don't take out more student loan debt than you expect to earn in your first year on the job (assuming you have the option). As Jack Bogle once said: "Your bond position should equal your age. I won't tell you this is the best investment advice you'll ever get, but the number of pieces of advice that are worse is infinite." It's not terribly complicated to figure out what we need to teach. We just need to jump to it.