Thursday, January 5, 2012

Wishes for the new year

As the new year starts, I have many wishes for financial literacy. I list the top three below:

Wish #1. I hope a leader to champion the cause of financial literacy will emerge and help give this topic the national and international attention it deserves. Michelle Obama has been the celebrity behind obesity and has helped not just raise attention around this important topic but also push for relevant programs in schools. There is a striking similarity between obesity and financial illiteracy. According to statistics, one third of the population is obese. Well, the same (and even worse) figures can be cited for financial illiteracy; about half of the population does not know the abc’s of finance and economics. There are severe costs associated with obesity, and there are equally severe costs of financial illiteracy (if in doubt, check the figures resulting from the financial crisis). A lot of initiatives have been undertaken at the national level to address obesity, from a revised food pyramid to limiting the amount of junk food available in cafeterias and vending machines. I may be one of five people in the country to know about the official web site offering financial information (do you want to guess which one it is?). Other celebrities have helped raise awareness of a variety of national and global problems. For example, Al Gore increased the attention on the environment and global warming. While I do not think the Artic will melt in the next few years (if I am wrong, please let me know), we are discussing or taking a lot of measures to address this long-term problem. On the other hand, the problem of financial illiteracy is urgent and pressing.

I do not have a strong preference about who this leader will be, but it would be good if he/she had a face (institutions are great, but it is hard to compete with Happy Feet). He/she should also be substantially liked by the public—a difficult objective in these days of falling financial geniuses, but there are many celebrities that people love. A sports celebrity would be great (Who does not like sports? Raise your hand!), in light of the similarity between success in sports and success with financial matters: it takes dedication, practice, and discipline!

Wish #2. I hope some BIG initiatives will emerge for financial literacy. As I have lamented in previous posts, a lot of the discussion about financial literacy has focused on its cost (as if we should or could offer it for free), and many initiatives to promote financial literacy are limited in scope and objectives. But this is a global problem that is becoming more and more pressing by the day (most of the political leaders in Europe have been ousted as a result of the sweeping financial crisis). This situation needs some big initiatives. How about a national campaign, or even a global initiative on financial literacy? How about a museum for financial literacy? We have declared April financial literacy month, so how about doing something concrete and big during that month (March or October are good for me too; I am not fussy about which month it occurs) that has lasting effects?

Wish #3. I hope the new year will see financial literacy in the schools; if not in the United States, then at least in a sizeable number of countries. Financial literacy is an essential tool for anyone who wants to be able to succeed in today’s society, make sound financial decisions, and—ultimately—be a good citizen. The financial crisis has put economic news on the front pages of newspapers almost daily, requiring individuals not just to be abreast of concepts such as deficit, national debt, and interest rate spread but also to evaluate the economic reforms that political leaders are proposing. Moreover, the cost of college education has been increasing at a rate faster than inflation, requiring students and their families to start planning for college as soon as possible, to be savvy about financial aid, and to manage student loans effectively. And young people are required to make one of the most important decisions of their lifetime—whether to invest in higher education—during high school, and they should make it in conjunction with a good understanding of the costs and benefits of that decision.

Perhaps I am only dreaming, but dreams are good. And my fourth wish is that all of you have a happy new year. Be in good financial health!


Nachiket Mor said...

Dear Professor Lusardi,

My colleagues and I have been participants in the Indian financial system for over two decades and have been largely working within mainstream financial institutions and have watched, with not a little concern, the retail finance industry evolve in a direction parallel to that of the FMCG industry with the added issue of very poor financial access of any kind to a vast section of the Indian population. We are now working hard to change the manner in which financial services are delivered to individuals (both rich and poor:; Our own sense has been that in order to get the most out of financial services and to effectively transfer risks individuals are going to have to use more and more complex financial instruments(such as index based rainfall insurance offered to farmers combined with deep out-of-the-money put options on rice so that the crop loan can be repaid without financial distress in the event of a rainfall failure or the collapse of the price of the crop)and it may be hard for financial literacy to keep pace with it even if it is well delivered. We also worry that one of the consequences of an approach that "people must fully understand all the financial products on offer before they buy any them" could be that "only those products that everybody can understand must be offered to any individual". In our view the implied "simplicity as a design principle" view takes away much of the power of financial services to simplify the individual's life.

Our approach has been to work more on the financial training and literacy of providers so that they indeed know what they are talking about and combine that with an approach that makes providers accountable on an ex-post basis to consumers. This is the benefit that has been available to corporate customers of financial institutions for a long time and we feel that there may be an opportunity to bring this to the individual customer as well. We also understand that the Australian Financial System has gone somewhat in this direction already.

Would be eager to hear what you think of this and to get the benefit of your guidance for our work in this area.


Nachiket Mor

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Anonymous said...

Well said!

D said...

Hi Prof. Lusardi, I came across your blog through the OECD Financial Education initiative and am very excited with my discovery. I work on Financial literacy research in India and have read your papers on people's financial behaviors.
On this specific post, I have one question: Do you think school and college going individuals are a good channels for 'sophisticated' financial education.
I ask this question because in the adult fin. education modules I have seen so far, the topics and financial products involved are pretty basic (due to the hostile financial environment for poor in developing countries).
In this post you mention the cost of financial illiterate adults - I wonder if educated youth who have a fighting chance of getting a salaried job should be targeted with rigorous fin. education programs.
Does being placed in a school-like settings make the mind more receptive to complex messages.. And are such individuals more likely to be influenced in to behaving in financially literate ways?

Ultimate Outsourcing Destination said...

Agree with you Professor. I also hope that some greater importance will be put on financial education and there by, the economical constraints would be resolved.