Many people share a strong pessimism about the future of
Social Security while secure pensions from a lifetime of working for the same
company have followed the path of buggy whips. So in spite of decades in which
the nanny state tried to protect people from life, people feel less secure than ever.
As usual and when all else fails, the experts turned to
education. Teaching people about the miracle of compound interest and providing
GPS guides to navigate the forest of investment alternatives and complex
securities would empower consumers to make wise investment decisions. But as
usual it failed according to a paper by three academics who analyzed 168 papers
covering 201 prior studies. The paper, “Financial Literacy, Financial Educationand Downstream Financial Behaviors” was made available online in January and
will appear in a forthcoming journal, Management
Science. The authors concluded that
These interventions cost billions of dollars in real spending and larger opportunity costs when these interventions supplant other valuable activities. Our meta-analysis revealed that financial education interventions studied explained only about 0.1% of the variance in the financial behaviors studied, with even weaker average effects of interventions directed at low-income rather than general population samples.
The authors mean by the phrase “0.1% of the variance in the
financial behaviors studied” that financial education can explain less than one
percent of the way in which people differ with respect to five areas: “Saving for an Emergency Fund,” “Figuring Out
How Much Savings is Needed for Retirement,” “Positive Savings / Investment
Behaviors,” “How do You Think Banks or Credit Card Companies Would Rate Your
Credit?” and “Credit and Checking Fees” (for bounced checks and late payments).
Financial education has a short shelf life according to the
paper. If it arrives just before a consumer needs to make a major decision it
can help, but the expiration date for training is two years. If the event that
triggers a decision happens after that date then the training has lost all
of its saltiness.
When the authors added personality traits to the models, education lost even more of its effectiveness. Those
traits included math skills, propensity to plan, confidence, risk avoidance, self-efficacy,
delayed gratification, restraint, and impulsiveness.
The authors recommended “just in time” education, that is, somehow
providing the training just before the moment consumers need to make a decision
and “...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.” In spite of the acknowledgement that financial training
costs billions of dollars worldwide every year, they never suggested just
stopping the waste.
A problem with the conclusions of the study is that the
authors ignore comparative advantage and specialization. The proponents of
financial education want to make experts of everyone regardless of ability.
However, many people lack the time and desire to develop expertise in finance.
Everyone should pursue their comparative advantage by specializing in what they
are best at. If they don’t want to learn finance or don’t have the ability,
they should leave financial advice to those who enjoy a comparative advantage
in it.
Another problem with studies such as these is the
failure to distinguish between skills and attitudes. The “soft skills” the
authors mention are not skills at all, but attitudes. Skills are easy to teach;
attitudes are very difficult to change, often requiring extended counseling
and/or a major personal crisis.
The first thing people need to learn is to save, but that
requires self-restraint and the ability to put off gratification now for
greater satisfaction later, or as they say in Austrian economics, less time
preference. Greater time preference means you want to spend more of you money
now and less in the future.
But savings isn’t a skill; it’s an attitude or a value that
people absorb from their family and religion. And that leads to a discussion of
Deirdre McCloskey’s “Bourgeois Values” series. Savings is one of the great
bourgeois values that Keynes and other socialists hated for centuries. Of
course, Keynes didn’t hate all savings, only personal savings. He wanted
the state to save and invest through massive taxation.
As a result of the Keynesian revolution, government has done
all it can to destroy the bourgeois value of savings. It taxes income and makes
saving harder and then punishes those who save by taxing the interest or
capital gains on savings. When you die it taxes those savings again. The state
rewards businesses that borrow instead of saving to finance operations by taxing
profits that are saved and allowing tax deductions for interest payments.
Dividends get no deduction for the company but are taxed again as income when
the stock owner receives them.
Fear is the greatest motivator to save, which is the reason Asians save so much of their income.
But the welfare states of the West have worked feverishly to remove fear of
life’s contingencies by providing for poverty, healthcare and retirement.
But the Fed is the worst enemy of savings. It keeps interest
rates as low as possible in order to encourage people to spend their savings
and borrow more, while price inflation that results from Fed policies eats
away at savings like termites in a log cabin. Finally, the recessions caused by
Fed monetary policies hurt the working poor the most because they have to use
up much of their savings during jobless periods.
Financial training clearly wastes enormous amounts of wealth
every year. The first steps toward restoring financial sanity in the US would be to
remove the efforts by the state and mainstream macro economists to keep us all
insane.
No comments:
Post a Comment