Does financial education work? What I’ve learnt over 25 years

I’ve been involved in financial education for 25 years, and I’m still learning. Perhaps we all are. Our financial education ecosystem is in a sorry state. Those that understand finance don’t seem to know how to reach audiences, and those that understand audiences seem to only deal in anaemic finance-themed entertainment. There is still work to be done. Here are some thoughts on where we are, and what we can do to get better.

Financial education can mean different things

Over the decades, a number of similar-sounding but different terms have emerged, reflecting different aspects and nuances of the field. Before we dive in, let’s define them:

Financial education is the input. It’s the content we consume. The industry doesn’t follow a standard curriculum of financial education content, though regulators exchange notes through the OECD. There have been a few recent OECD initiatives to share toolkits, encouraging anyone to use them.

Financial literacy is the output. It’s the skills one acquires after receiving financial education and practising what one learns. Financial literacy is measured by an assessment which can be as short as 3 or 5 questions. Simple things: Can one translate percentages into actual amounts? Does one understand compounding? Can one compute the ‘net’ return from interest rate and the inflation figures? The assessments don’t even require actual calculations – just a grasp of key concepts. Other questions – such as whether mutual funds are safer than an individual stock – try to understand whether one understands different product types and how risk can be diversified.

Financial wellness is an objective state with four aspects: control over day-to-day finances, capacity to absorb financial shocks, financial freedom to make choices, and progress towards financial goals. The term is often used by large companies offering educational sessions.

Financial well-being is a mental or emotional state – the subjective feeling of financial security. It describes how we feel about our financial situation. Financial well-being builds upon financial wellness, but also depends on behaviour, knowledge and personal traits, as is summarised in the images below.

Source

Source

These are all broader than ‘investor education’. Investor education only covers investing. Financial education covers a wider space of personal finance, including budgeting, insurance, borrowing etc.

Who should be responsible for financial education?

Short answer? I don’t know.

I don’t know why schools don’t teach basic finance. It’s more useful than all the history we seem to forget anyway, or all the geography we still don’t appreciate, judging by the poor state of climate change debates. I had the good sense to pick economics in school, though all we were taught were partisan capitalist theories that I’m still unlearning.

Should the financial services industry be responsible for financial education? Well, it offers financial products, but only with the intention of making profits. As consumers, the caveat emptor principle (or the ‘buyer, beware!’ principle) applies to the financial services industry, just like it does to healthcare, or property, or anything else that’s important.

Who else, then?

In India, the capital markets regulator has taken on the responsibility of investor education. At first, it conducted educational / awareness sessions directly. Eventually, it directed the mutual fund industry to spend a portion of their assets under management on ‘investor awareness programs (IAP)’. Half of this is spent at the industry level. The other half is spent by individual asset management companies.

I used to think this was a great initiative and wondered whether the banking regulator should mandate this for banks to tackle broader personal finance education. Unfortunately, though, it has had some unintended consequences.

How is financial education done? The input

The IAP budget is big enough to attract people who have no background in finance but are good storytellers. Advertising agency executives try man-splaining the benefits of this budget to me all the time. Of course, good storytelling is important. But so is sound financial content.

I have a vested interest in saying this: I have finance qualifications. I became a financial educator myself in 1999, albeit after two graduate courses in finance. I wasn’t aware of any regulator guidelines, nor was I an expert in the principles of pedagogy / andragogy. Behavioural finance, back then, was a new-ish concept that my employers didn’t believe in. Neuroscience had nothing to say on the matter. All I started with was good intentions. All I did was to try and write simply.

I wondered why the few money media personalities didn’t have any finance qualifications. To be fair, there were hardly any finance qualifications in the 80s and 90s. And if someone put in the hard work to get the CFA charter, they would pick a more traditional, secure career in the finance industry.

By the mid-2000s, I was fascinated by American money personalities like Suze Orman and Dave Ramsey. Especially Orman. She taught herself finance after trusting her capital with a broker who lost it in speculative trades, and eventually sued Merrill Lynch for the loss while working with them at the same time. Her authoritative tone and advice made sense for the debt-ridden audience she was catering to. Then, there was the book Rich Dad, Poor Dad. It encouraged leveraged asset ownership, which made some sense and was hugely useful for some real estate markets, even though it wasn’t applicable universally, and hence, possibly dangerous. It was also not how the author made his money.

By this point, finance was taking to the media. Education had evolved into entertainment. Delivery mattered more than content. Many tried to emulate popular American finance shows in India in the mid-to-late 2000s. They couldn’t hack it. Perhaps TV gate-keepers picked anchors who lacked the X-factor, the je ne sais quoi needed to connect with an audience. Perhaps the audience didn’t care. Online platforms provided more opportunity, but they didn’t create breakout successes either. Financial education just didn’t engage people.

The world has evolved since. Now, you can even learn about learning, for free, online. There is enough technical information within our reach. One would think people’s financial literacy and wellness would improve.

But people don’t evolve. We still work on the same incentives.

The supply of financial education content increased steadily in the 2010-2020 decade. Then came a pandemic-induced avalanche of people taking an interest in their finances. Few discovered the treasure trove of information online. Most turned to people who looked like them on social media instead, never mind the quality of education. Within a few years, the problem had turned on its head. The audience couldn’t get enough of financial education content, only now, the content was suspect.

There is only so much education that can be delivered through short videos twice a week. Instead, social media influencers waded into the turf of research and advice without qualifications or licences. Things grew worse with the crypto wave. No matter how much I urge people to become financially secure before experimenting with play-money in my financial wellness sessions for companies, the audience always has questions about Bitcoin.

All this content was initially funded by the IAP budget. It was later augmented by the VC money that fintech players raised, and corporate marketing budgets that switched from advertising to content marketing. Now, it seems like everyone wants to do financial education.

Here’s the situation today:

• The regulatorily-mandated IAP budget has created a supply of investor education content and initiatives. General and VC-funded marketing budgets have added to the money available.
• Advertising agencies and independent content creators have increased the availability of such content and initiatives at a mass scale.
• The regulator and mutual fund industry conducts physical sessions through a network of trainers who may not be qualified in finance or education.
• While school curricula still don’t appear to include financial literacy, there is an appetite in some pockets to adopt such initiatives.
• There are different segments of consumers who need to be catered to – who may not explicitly ask for it.

Does financial education work? The output

To many in this space, whether financial education really works is an open question.

I’ve always been in the “it works if done well” camp. Sceptics, on the other hand, prefer placing greater responsibility on the financial services industry over waiting for educational initiatives to pay off. They believe the caveat emptor principle is poorly suited to the industry, and that it should be pushed to design better products and services instead. I say: let’s do both. Education doesn’t absolve the industry of responsibility; it’s not a licence to obfuscate or mislead.

For decades, this debate has happened on principles. There was no data one way or the other. Now, however, the data has begun trickling in. Especially after the 2008 global financial crisis, the academia has been studying the question of financial literacy with interest. In a 2020 Morningstar podcast, Annamaria Lusardi, an authority on financial education, noted great academic curiosity around the topic. She also went through the recent research around the efficacy of financial education.

Her conclusion? Financial education works.

With one caveat. Neither her podcast nor her papers seem to spell out the quality of the input you need. Perhaps this is why these debates carry on. Financial education works, yes, but that doesn’t mean all financial education works. We often work with poor inputs. Of course they won’t be effective.

Indeed, this is the very discussion I had during a recent podcast with another eminent professor who teaches personal finance.

Professor Terrance Odean is the Rudd Family Foundation Professor of Finance at the Haas School of Business at the University of California, Berkeley. Odean has written numerous research papers, edited prestigious journals and won awards. As an undergraduate at UC Berkeley, he studied judgement and decision making with the 2002 Nobel Laureate in Economics, Daniel Kahneman himself.

In this snippet, he talks about how he teaches students about investment fees. It’s a master-class. He focuses on material topics, encourages the students to find information themselves, and then discuss possible reasons. This is what quality financial education looks like. This works.

Aiming higher

Like Professor Odean, I wouldn’t waste my time on financial education if I didn’t think it worked. But I also think there are challenges before us. We need to reach mass audiences in their language, learn how to engage them and get them to think. We need to make financial education effective.

We aren’t there yet. Many of the financial education initiatives I see today are simply too short, with little structure and poor quality control. They ask the audience to grasp, in minutes, what professionals took years to master. Even billboards with half a sentence qualify as ‘investor education’. We can do better.

Financial education needs to be credible, comprehensive, relatable and timely.

One way of doing this is to build a comprehensive library and brand at the same time, so that audiences can find what they need when they need it. I tried doing this with The Money Hans, although, in retrospect, I perhaps failed at making it relatable. This is what Karthik Rangappa has done in building the Varsity library slowly and steadily on the Zerodha site. More recently, the videos on Varsity’s youtube channel have made the site one of the world’s largest financial education initiatives.

Let’s do more. Let’s build comprehensive, quality content, based on good educational and storytelling principles. And then, let’s work to bring it to people who need it.

Financial education works, when done well. If it isn’t working today, that’s on us.