Why you can't teach money
Law professor Lauren Willis suggests that we just give up on financial literacy - she says it's a waste of time and can even get you into trouble.
(Money Magazine) -- When Americans are in financial distress, politicians often call for better education. Case in point: The Economic Recovery Act of 2008 allocates funds to improve borrowers' knowledge of home loans.
Lauren Willis, an associate professor at Loyola Law School in Los Angeles who specializes in financial products regulation, says that's the wrong move. She argues that trying to teach consumers to make wise money choices is not only a waste of time and resources, it may be dangerous.
Question: What's so bad about financial education?
Answer: It doesn't work. Sellers of financial products spend billions drowning out well-meaning messages to consumers from nonprofits or government agencies.
Also, financial products are always changing - credit and insurance products have changed dramatically in the past 20 years - making it hard for educators to keep up.
It's not like sex education. As far as I know, people get pregnant the same way they did when I was in high school.
Q. But aren't basics such as budgeting always applicable?
A. Teaching them is a waste of money. Studies show that sending people to either high school personal-finance classes or adult retirement seminars does not result in better financial behavior.
It may do the opposite. Financial literacy classes give people the illusion that they can successfully manage their finances. So rather than seek help, they end up making worse decisions.
Q. Then what should we do?
A. Stop trying to turn everyone into a financial planner. Instead, try to get everyone to understand that the people selling you financial products often don't have your best interests at heart.
What's more, politicians need to regulate financial products and make them into things that will benefit consumers, rather than expect education to be the cure-all it is not.
Q. What type of regulation do you think would work?
A. Sellers could be required to offer you a default product that is safe. Whenever you applied for a mortgage, for example, you would have to be offered a 30-year fixed amortizing loan.
Q. Should parents stop teaching their kids about money?
A. Of course not, especially when it comes to day-to-day spending choices. Helping kids resist buying things that are not good for them or are excessive has to do with explaining that happiness doesn't just involve buying things.
And that's something families can do a much better job of teaching than government can.
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