Tuesday, September 6, 2011

Think big, in a practical way

I left for Italy in mid-August feeling pretty discouraged. Most of the recent discussions I had heard about financial literacy were focused on cost. This is clearly an important concern, but, in practice, when people talk mostly about costs, it often means they are not interested in “buying” it. And while the cost of improving financial literacy is a very legitimate concern, how about the cost of this financial mess we’re in. How about that?

The discussion around some financial education programs was also not a mood booster. Some of the papers I saw presented this summer covered programs in which individuals—often impoverished and with little education—were brought to a classroom and given a few hours of “financial education.” The expectation was that those few hours would transform people into savvy entrepreneurs or investors. And what was the main discussion around this? How much these programs cost!

This dominant concern about cost obscures the fact that we face a very important and challenging problem in need of a solution. But we need to think big; we need creative ideas that can help overcome big barriers. Lack of financial knowledge is not something that can be tackled by bringing the adult population back to a classroom for a lecture or two on financial education. We need to be practical, too, regarding what can be implemented. As my college friend—a successful entrepreneur I get together with every time I return to Italy—put it: "think big, in a practical way."

Being in Italy, with a break from my daily routine, allowed me to focus on big ideas, and I have some recommendations, that are also practical, to at least start the discussion, and I would like to hear from others.

Big Idea #1: TEACH THE YOUNG. Financial literacy needs to be implemented in schools. It is too difficult to reach the adult population and it is hard to do any teaching if there is little or no base to start from. Also, we need people to be financially literate before rather than after they engage in financial transactions. There will and should be costs of educating the young. It is meaningless to mandate financial education without, for example, training the teachers to teach those courses. Mandates do not make people any smarter, but having a well-developed curriculum that is followed by trained teachers might.

Big Idea #2: FOCUS ON WOMEN. Women have low levels of financial literacy (lower than men), but they also know that they lack knowledge. Moreover, they want to be “treated”; in most financial programs I have been involved with or read about, the majority of participants have been women. It is going to be much easier to reach and deliver to a population who is interested in financial literacy. This is a simple truth that has been mostly ignored. There are costs of only thinking about costs!

Big Idea #3: MAKE IT SIMPLE. Some financial decisions are truly complex, but there are universal concepts that are at the basis of most financial decisions and that can and should be explained in very simple ways. I am talking about the power of interest compounding, the effects of inflation, and the benefits of risk diversification. In fact, even this is economic jargon we can get away from. Let’s use plain English and explain these ideas in very simple ways. We can even come up with ways to tell stories to teach the concepts so that even a five-year-old could learn them.

Speaking of five-year-olds and of being practical, I was given the following test to see whether one can think practically. Here it is: How do you put a giraffe into a refrigerator? The answer is at the end of the post, but please do not look before you come up with your own solution. I thought about it for five minutes and came up with a method about as simple as putting a man on the moon. That evening, I saw my little niece Giorgia drawing a picture of the family dog, depicting him with 9 legs and 2 enormous eyes. I thought she would be an ideal person for the giraffe test, so I asked her very innocently: “Giorgia, how do you put a giraffe into a fridge?” She looked up, gave me a big smile, jumped from her chair, and ran to the fridge. Moral: you can never beat the creativity of a five-year old!

Question: How do you put a giraffe into a refrigerator? Answer: You open the door and put the giraffe in.


Steve Kahlich said...

Dear Professor Lusardi,

I am a little disappointed that you do not mention Junior Achievement in this or your previous posting when discussing financial literacy for the young. We reach over 4 million school kids K-12 a year in the United States alone and have a real impact on educating children to be financially responsible. Please check out www.ja.org for more details, and I hope you will include our organization in future postings about educating the young about their personal finances.

Personal Finance said...

Nice Blog. Thank you for sharing and I want to share information about Cash Flow Navigator which provides free information and resources for their members to plan and achieve Financial Independence