Financial decisions can be challenging. Many of us make bad decisions about when to save and when to spend. And if we’re being honest, most of us would admit to having a limited capacity to properly evaluate different mortgage, savings and investment options. To help us, governments, schools, employers and other organizations have introduced a range of financial literacy initiatives. Based on recommendations from the Toronto Youth Cabinet, for example, the Ontario government will make financial literacy part of the grade 10 curriculum starting in 2018. The aim seems reasonable. Who could disagree with the idea of students knowing more rather than less about making sound financial decisions? On closer inspection, there are reasons to be skeptical of the effectiveness and ethical defensibility of financial literacy programs.
One problem with financial literacy programs is that many of them just don’t seem to work. A 2014 meta-analysis of over 200 studies of financial literacy programs found that the programs explained almost none of the differences in participants’ financial behaviour and that even marginal literacy gains disappeared less than two years later. Studies of state laws requiring financial literacy education and of high school financial management programs found no effect on financial knowledge or behaviour. Interestingly, researchers have discovered that old-fashioned math classes do a better job of improved financial knowledge and behaviour than financial literacy programs.
If they’re not especially effective, at least financial literacy programs don’t harm those who participate. Or do they? Some studies show that people’s willingness to seek financial advice decreases as their confidence in their own financial knowledge increases. The smarter you think you are, the less likely you are to ask for advice that could help you make better decisions. If taking a financial literacy course increases confidence without increasing real financial knowledge, then there is a case to be made that the courses put the financial well-being of participants at greater, not lesser, risk. People may be better off not taking them at all.
Most importantly, we should be concerned when financial literacy is offered as a substitute for action on poverty—as is sometimes the case—and with the ways that initiatives seem to imply that the poor are responsible for their condition. Some philosophers who think about fairness and responsibility argue that while people ought to be responsible for what results from their choices, they should not be responsible for what results from circumstances that are beyond their control. For example, if I regularly choose cookies over apples when both are available, and choose to drive everywhere when I could easily walk, then I should bear more responsibility for the costs of my eventual poor health than if I lack food altogether and have a disability that prevents me from exercising. We disagree about where exactly to draw the line between what constitutes a choice and what a circumstance, but the distinction itself has some appeal.
Financial literacy programs are premised on the idea that poor choices, not circumstances, are the cause of individuals’ financial difficulty. The expectation is that people can improve their financial well-being simply by learning how to make better choices. To save money, for example, you should buy a 12-roll package of toilet paper for $9, rather than single rolls at $1.29 each. Buying single rolls would be irrational. Unless you only have $3 for toilet paper, in which case buying single rolls is the perfectly rational thing to do because it’s your only option. Even if financial literacy education can help at the margins—and that’s debatable—on its own, it does not address the circumstances in which people find themselves and which effectively force them to make seemingly irrational decisions.
No financial literacy initiative can teach a child how not to be born into poverty. No financial literacy program can teach a person how not to suffer from a genetic health condition which requires expensive drugs to manage. No amount of financial literacy can teach a person earning less than $30,000 how to pay for food, rent, transportation and childcare costs for two children in downtown Vancouver. By making it seem as if financial well-being is more a matter of choice than circumstance, financial literacy programs reduce sympathy for those living in poverty. They also divert attention from efforts to address the structural causes of poverty and the need to better regulate the growing number of complex financial products available to consumers.
When presented as a way to improve money management for people who have money, the rationale for financial literacy seems sound—even if the programs don’t quite deliver on their promise. But the idea that financial literacy initiatives can help people to escape or avoid poverty simply doesn’t add up from an ethical point of view.
Daniel Munro teaches ethics in the Graduate School of Public and International Affairs at the University of Ottawa. Listen to The Ethics Lab on Ottawa Today with Mark Sutcliffe, Thursdays at 11 EST.