Hunting Happiness

The current issue of The Economist has an interesting article about financial literacy, and the lack thereof. It starts off with a great quotation from John Bryant.

Everybody wants it. Nobody understands it. Money is the great taboo. People just won’t talk about it

He goes on to say that the subprime mortgage mess is a perfect example. Subtract greed as the catalyst and the root cause is massive financial illiteracy.

Some interesting facts from the article:

• In Q4 of 2007, subprime ARMs were more than 40% of the foreclosures but only represented 7% of the total mortgage space.
• 40% of American credit card holders pay less than the full amount due every month on their main card
• Almost 33% do not know what their interest rate is
• More than 50% of Americans felt they had learned “not too much” or “nothing at all” in school about personal finance
• 75% of junior or senior high school students didn’t know that income tax has to be paid on interest earned in a savings or money market account
• 60% didn’t know the difference between a company pension, a 401(k), and Social Security
• 25% of Britons do not know their pensions are invested in the stock market

Attempts at education in high school have generally failed. The only one with much success is the stock market investing game most of us are probably familiar with. The game emphasizes high risk behavior due to the short-term nature of the game. This further enforces the widely-perpetrated mentality of instant gratification and is therefore self defeating in the bigger picture.

I certainly did not learn anything in school about personal finance and probably wouldn’t have correctly answered many or most of the questions mentioned above. And I graduated near the top of my class from a highly-regarded school. I can’t imagine those who had substantially less fortunate educations.

Another camp in the personal finance debate argues that, although depressing, the likelihood of sufficiently educating the majority of students/people is just about nil. Instead, they argue, the focus should be on making it easier through “sensible default options”.

One example is automatically enrolling employees in 401(k) programs and forcing them to actively opt out instead of opt in. Further steps would be to automatically select an asset allocation appropriate to the person’s age, and perhaps reallocate every few years automatically.

Another example given was credit card requirements. What if credit card companies were required to give their customers a file every year detailing the methods use to determine charges, and what those actual charges were. The thought is that numerous websites, probably many like this and other personal finance bloggers, would quickly respond. A consumer could upload his or her file and the website could read that data and then suggest the best card for him or her. This would also increase competition between the various card issuers and further benefit consumers.

So what do you think? Is it better to educate people on the existing system that is fairly complicated, or better to change the system to be more simple? Personally I think a mixture of both should be done. I think schools can and should do a LOT more to teach specifics of personal finance, and I think parents need to do a lot more to teach the key higher-level principles like patience and telling good deals from scams.

Also, how much personal finance education did you receive, and from where? Post in comments!