Many people think they lack financial literacy when what they really lack is financial confidence.
This may not be representative of the country at large. But in the sample of people I deal with professionally (ie, clients) or personally (friends and loved ones), the issue is often confidence rather than knowledge or ability.
In fact, the main message most of my clients get from dealing with me is the confidence that “you’ve got this”. Yes, they get a benefit from the actual advice I give. But I think this sense of comfort and confidence ends up having a more positive impact on their actual quality of life.
Finance really doesn’t have to be that hard. So why does it seem that way?
There are incentives to make people feel less confident
You know a good way to get consumers to buy your goods or services?
Scare them. Make them think that they need what you have to sell.
Maybe these people are well-intentioned. I don’t know. But this perspective doesn’t sit with me.
My view is that personal finance doesn’t usually need to be complicated. In fact, if your financial affairs are complicated, it’s often a sign you’re doing things wrong.
Again, my experience is anecdotal and influenced by my own biased sample of people I deal with. But a lot of people talk to me thinking they need a kick up the bum. In reality, they usually need a pat on the back instead.
By focusing on financial literacy, are we privatising shortcomings of public policy?
The biggest advocate for financial literacy is often… the financial services industry.
Doesn’t that strike you as weird?
I’ll give Scott Pape (aka The Barefoot Investor) his due: he’s very good at calling out financial institutions that take advantage of Aussies in the name of “education”. What are banks doing teaching financial education to kids? (Eg CBA’s long-standing Dollarmites initiative.) Maybe these initiatives start with good intentions. But good intentions can pave a road to… somewhere. And that is especially the case where the incentives aren’t quite right.
Sure, money touches all of us. But the law touches us. Health issues touch us. But you don’t hear lawyers cry about “legal literacy” or doctors talk about “health literacy”.
Is all this talk about financial literacy a red herring?
In 2015 Helaine Olen wrote an article for Slate explaining that we should “Stop trying to make financial literacy happen”. Her key argument: financial literacy is “a noble distraction from actual consumer protection”.
She explains: “The organisations most interested in promoting financial literacy are the ones that benefit the most from laws that assume consumers can be educated — and don’t need legal protection from corporate financial predators.”
That's an interesting thesis.
That same year, the Los Angeles Times published an op-ed by Lauren E Willis (a law professor) and Theresa Amato (executive director of Citizen Works). It was titled “What your bank owes you: clarity”.
Willis and Amato argue that “Trying to educate [consumers] out of [problems such as hidden fees and risks] is an abdication of our collective social responsibility. We don’t expect people to be their own doctors or lawyers; why would we expect them to be their own financial advisors? When experts cannot agree on answers to the questions, pretending that we will teach artists and architects, farmers and flight attendants, police officers and plumbers to find good answers is a cruel joke.”
They explain that financial education isn’t the answer: the answer is a “financial marketplace… structured so that ordinary people — people with limited time, math skills, attention and willpower… can navigate it safely and effectively.”
In other words: we need an environment where it’s easy to make the right decisions. If it’s hard to make the right decisions, that indicates we have a bad system.
I’m reminded of a comment that Esther Perel makes in Mating in Captivity: "In our individualistic culture, we tend to 'privatize' shortcomings of public policy by seeing them as personal failures".
The need for financial literacy is a function of the level of complexity that average Kiwis need to be exposed to in relation to their financial affairs. I’ll grant that some aspects are relatively complicated (personal insurance, for example: use a specialist adviser for this!). But a lot of it can be done pretty easily.
(I’m not wearing a tin-foil hat. I’m not saying there is some conscious, sinister agenda. I think this sort of equilibrium can naturally occur over time. Over the long-run, incentives have a great way of influencing outcomes.)
An aside: other forms of literacy
This is a completely unrelated aside: if we grant that financial literacy is important, I’d argue that there are lots of “literacies” that we need in order to thrive in the modern world.
Health literacy is a good one. But what about cultural literacy? Including, for instance, that learning about sex from porn is like learning about driving from The Fast and the Furious (”porn literacy”), and that romantic plots in movies and novels don’t reflect the reality of most intimate relationships: the hard part often isn’t the start of the relationship, but maintaining a quality relationship over the course of years and changing seasons in life, after the credits roll (”Hollywood literacy”)? Or learning about how to read critically in general, especially with respect to the media?
There are lots of things we need to know to thrive in this modern world. But let’s not make it harder on others – and ourselves – than it needs to be.