Financial education -- for as much as it is depicted as the proverbial fountain of knowledge for personal financial empowerment -- isn't working. Because the human mind, though highly evolved, is not perfect, few people are naturally inclined to make the best financial decisions for themselves. Unfortunately, our current methods for teaching financial literacy simply don't help us overcome our natural, human instincts.
However, the challenges before us are not insurmountable. The problem facing financial education is that existing efforts to promote sound financial decision-making, while well-intentioned, have not kept pace with what psychologists, economists and others have learned about how the human mind works. Now is the time for a new collaborative approach across public and private sectors to instill mindful spending and borrowing habits in our classrooms and beyond.
In the past, we have relied, albeit inconsistently, on traditional financial education -- teaching fundamentals in a classroom setting. But poor financial literacy rates in this country show that these efforts haven't yielded fruit, because they don't take into account what actually motivates us. By recognizing the psychology that goes into financial decision-making, educators, financial institutions, consumers and others can implement solutions that help all of us develop and maintain strong spending and borrowing patterns.
First, we need to help consumers learn positive financial behaviors by ensuring they actually put them into practice. Designing smart, nurturing financial management programs has proven successful in helping people carry out the basics of managing spending and borrowing. And we can do this by making individual financial tasks easier to accomplish and easier to see the rewards, whether it is developing budgets, tracking expenses, identifying ways to increase income, finding the most favorable terms for mortgages and other loans, matching a person's credit cards to their specific needs and paying outstanding balances down intelligently.
By helping consumers make strategic, smart financial behaviors a part of their everyday routines, they can trick their brains into turning them into habits. A successful example worth replicating is the Borrow Less Tomorrow program developed by Yale economists Dean Karlin and Jonathan Zinman, which helped tax-preparation clients in Tulsa, Oklahoma during the 2010 tax season by incentivizing participants to make better decisions about managing their debt.
Second, we must embrace modern technology, particularly when building these personal financial management tools. Tools such as Chase Blueprint collect users' spending data in one place and help them recognize spending patterns and find ways to save money or correct behavior before it gets out of control.
Finally, we must be more innovative in the way we teach financial literacy to young people, particularly during the K-12 years. One easy way is to apply gaming techniques to financial education. The Jump$tart Survey of Financial Literacy showed that of all the types of financial education in taught in school, the stock market game worked best because it is not only interactive and contemporary, but fun as well. Games motivate students' competitive instincts and activate the reward centers of their brains, all of which helps makes it easier to teach them about mindful spending.
We need a collective effort to improve financial literacy. The private sector and the public sector, members of the media, educators, and consumers can all play a role in bettering financial practices.
- Private sector firms, especially those in the financial sector, can harness innovations that help people make better decisions about their spending and borrowing.
In the end, individuals themselves will continue to bear the greatest responsibility for making sound decisions about spending and borrowing. They must be the ones who decide they want to improve their financial decision-making skills and take advantage of innovations for directing their financial behaviors and shaping their paths to financial wellbeing.
Hersh Shefrin is the Mario L. Belotti Chair in the Department of Finance at Santa Clara University's
Leavey School of Business. He recently authored Born to Spend? How Nature and Nurture Impact Spending and Borrowing Habits.