The financial markets and the available financial products are becoming increasingly complex, making it more and more difficult for individuals to make the best possible financial decisions. Nevertheless, the majority of the population makes corresponding decisions themselves instead of seeking behavioral recommendations from experts. From this point of view, it seems necessary to invest heavily in teaching financial literacy. Children and young people in particular could be introduced to the subject at a young age and build up relevant knowledge and the necessary skills. In practice, however, it is clear that the effectiveness of such educational measures is doubtful. This raises the question of whether the high investment costs involved in financial literacy education for children and young people are worthwhile at all. In this post, we will look at why sufficient financial knowledge is beneficial for children and young people, how current education measures affect their financial knowledge as well as the corresponding skills, and what welfare-enhancing alternatives might be conceivable.
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The teaching of financial knowledge is also increasingly seen as a central component of the general education of children and young people. Even if they generally do not yet have to make any serious financial decisions, investments are made in the training of appropriate skills, as negative consequences such as high levels of debt often result from inadequate financial knowledge. To ensure that the knowledge imparted to children and young people also has a positive impact on their later behavior, it is also relevant that not only theoretical knowledge is imparted, but also the necessary skills and cognitive strategies to apply the knowledge in practice.¹
The significance of financial knowledge for today’s everyday life would justify extensive investment in educational measures in this area. When considering costs, however, it is important to remember that implementing relevant courses in everyday school life also involves significant opportunity costs. Such courses would, for example, replace other learning content rather than supplementing the curriculum, and thus important decisions would likely have to be made about which of this content to replace. However, while investing in such measures seems logical and appropriate, it should be noted that existing educational programs dealing with financial literacy have delivered severely limited results. In particular, the time gap between acquiring the knowledge at school and applying it in one’s own everyday life poses a problem. This applies not only to effective application on the part of individuals, but also to measurability in the context of scientific studies, as it is difficult to prove causal links over the long period of observation. Another limitation to effectiveness results from the fact that existing knowledge is not being applied. Many people make financial decisions based on their habits or are guided by their emotions instead of aligning their behavior with available knowledge.²
Even though it has been empirically proven that sufficient financial knowledge has a positive impact on money management, the lack of effectiveness of financial education measures also leads to voices being raised against such measures. Willis (2008), for example, takes a stand against education interventions in the form in which they are currently implemented. She argues that it is not the actual financial knowledge of individuals that is relevant for behavior, but the self-confidence of the actors. On the one hand, overconfidence about one’s own competence in finance can lead to overestimation and thus to poorer decisions. On the other hand, too low self-confidence potentially results in inhibitions, so that activities necessary to make informed decisions regarding one’s finances are not taken up at all. Educational measures often do not improve the actual financial knowledge, but only the self-confidence of the individuals, so that the discrepancy between the self-perceived financial knowledge and the actual financial knowledge may increase. If this is the case, it may lead to financial behavior not improving as a result of education, but perhaps even worsening. The author therefore presents alternatives to the classical teaching of financial knowledge that could have a positive impact on the welfare of individuals. These could be, for example, measures such as the establishment of a network of experts through which consumers can obtain affordable expert knowledge. However, welfare-enhancing standards developed and enforced by legislators or increasing the transparency of financial products so that it is easier for consumers to make appropriate decisions would also be conceivable.³
Whether the approach of completely dispensing with basic financial education for children and young people is the right way to go seems questionable, to say the least. However, it is undisputed that extensive reforms are needed in this area. Teenagers and young adults in particular have a continuously increasing responsibility when it comes to the proper use of financial resources. Even if they seek advice from experts, they are still the decision-makers themselves in the end, and it is therefore necessary to be able to understand and process the experts’ recommendations and advice. Without any basic knowledge of finance, however, it can be assumed that this would be problematic. One conceivable approach would be to link the two ways of thinking by imparting basic knowledge as well as offering support in making decisions. In the medium term, those affected could perhaps benefit from a transfer of knowledge from experts to consumers so that they can also make better decisions independently in the future.
In addition to a change in the infrastructure that individuals in need can access, it seems inevitable that the methods by which financial knowledge is to be imparted will be changed or improved. The mere imparting of theoretical knowledge does not seem to be very effective if there is not at the same time an opportunity to apply it in one’s own life. One recommendation could therefore be that appropriate educational measures should always be geared to the life circumstances of the learners. However, this degree of individuality would require an enormous amount of resources, so that implementation seems rather unrealistic. One approach to solving this challenge, however, could be found in technological development. With the help of software solutions and other simulations, individuality could be taken into account without the need for a teacher to develop and implement an individually adapted learning program. Many computer games are already at a very realistic level, and interactivity is also present in multiplayer games. So why shouldn’t children and young people be given the opportunity to learn relevant financial knowledge through play and to consolidate it in simulated scenarios that could also correspond to reality. Similar simulations already exist for trading investment products on the stock market, so extending this to teaching fundamental knowledge should not pose a significant problem. All parties could benefit from such a solution, as it could reduce the burden on both the teachers and the learners, while still providing a more effective way of learning.
It is difficult to provide a general answer to the overarching question addressed in this post. The financial literacy education that is currently provided to a large extent is hardly suitable for building up relevant knowledge as well as the necessary skills for independent application in everyday life. From this perspective, it would be justified to claim that investment should not be made in corresponding educational measures for children and young people. On the other hand, current developments in everyday life mean that the relevant skills are becoming increasingly important, so that a significant improvement in the learning opportunities on offer would seem to make more sense here. All participants would presumably benefit from a concept that promotes the effective transfer of knowledge and the experience of competencies in the context of one’s own application – regardless of whether this takes place in actual life or in a realistic simulation.
¹ Amagir, A., Groot, W., Maassen van den Brink, H., & Wilschut, A. (2018). A review of financial- literacy education programs for children and adolescents. Citizenship, Social and Economics Education, 17(1), 56-80. https://doi.org/10.1177/2047173417719555.
² Fernandes, D., Lynch Jr, J. G., & Netemeyer, R. G. (2014). Financial literacy, financial education, and downstream financial behaviors. Management Science, 60(8), 1861-1883. https://doi.org/10.1287/mnsc.2013.1849.
³ Willis, L. E. (2008). Against financial-literacy education. Iowa Law Review, 94, 197. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1105384.