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At Questis, we’re all about helping you reduce your employees’ level of financial stress. We closely monitor the financial wellness landscape for new data and information about trends. Behavioral finance is clearly a trend that’s here to stay. In our latest white paper: So Many Courses, So Little Progress: Why Financial Education Doesn’t Work — and What Does, we want to share our findings with you about typical financial education’s surprising lack of effectiveness. We invite you to take a detailed walk through the research to see what does and doesn’t work to change financial behaviors and improve outcomes for employees. We hope by reading it that you will gain a better understanding of financial education and find useful information that can guide you when considering financial wellness solutions.

Over the weeks to come, we’ll be releasing segments of the white paper as blog posts. 

Here is the first segment:

Businesses are realizing the extent of the financial stress crisis affecting both their employees and their balance sheets. Almost every month, a new study or report is published detailing the growing percentages of American workers living paycheck to paycheck or who have saved too little for retirement. According to the Federal Reserve Bank of New York, the total household debt in the first half of 2017 has already reached $12.8 trillion dollars, more than the $12.7 trillion peak seen during the 2008 mortgage meltdown. And unlike the financial crisis in 2008, this new high is being driven by non-housing related debt, primarily credit card, student loan, and auto loan debt. Executives are waking up to the fact that financially stressed employees bring these concerns and issues to the workplace, resulting in lost productivity from presenteeism, absenteeism, exacerbated health issues and higher employee turnover numbers, and are taking action to reduce these undesirable outcomes.

Increasing financial literacy through employee education seems like an obvious solution. If only people really understood how compound interest works, or had more information about how to make good financial decisions, then surely they could avoid getting a low credit score, paying high interest rates on consumer loans, or even borrowing against their 401(k). Like many obvious solutions, however, upon closer inspection it’s clear that financial education alone hasn’t worked–and perhaps it never can. The way our brains are wired to process information typically works against us when it comes to making sound financial decisions, and changing behavior takes more than a single class.

A Brief History Of Financial Education

The concept of financial literacy and its importance as a life skill has been around for a long time. Early American president John Adams wrote, “All the perplexities, confusion, and distress in America arise not from defects in their Constitution or Confederation, nor from want or honor or virtue, so much as the downright ignorance of the nature of coin, credit, and circulation.” In 1849, Victorian bank manager James Gilbart promoted financial education as a way to help potential customers of his London & County Bank feel comfortable by knowing what to expect when opening an account. In the US, the Smith-Lever Act of 1914 established the funding that land grant colleges still use to teach cooperative extension courses in personal finance.

Congress, along with nonprofit community organizations, continued to support these educational efforts over the decades and in 2003 established the Financial Literacy and Education Commission, which subsequently released a national strategy for financial education. Thanks to Congress, since 2004 Americans have celebrated April as National Financial Literacy Awareness Month. And President George W. Bush signed an order in January 2008 that created an advisory council on financial literacy.

Yet in spite of legislators’ concern over Americans’ lack of financial literacy, only 17 states require high school students to take a personal finance course. Many authors have pointed out that such educational efforts, although admirable, can also be seen as as a form of caveat emptor, placing sole responsibility for reducing financial stress on the individual rather than introducing more regulation of the financial services industry—an industry which regularly offers new and increasingly complex financial products.

The subprime mortgage crisis from 2007 to 2010 increased pressure to protect the public from predatory financial practices, and in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. This act created the Consumer Financial Protection Bureau (CFPB). The CFPB provides tools and resources directly to consumers to help them make better informed decisions, and supports research on effective methods of financial education.

But Is Financial Education Effective?

It certainly doesn’t look that way once we analyze the body of research to date. Multiple academic studies have shown that claims of a cause and effect relationship between financial education and improved financial behaviors have very little evidence to support them. When examined by a team of researchers conducting a meta-analysis of 90 previous studies, the correlations between financial education and improved financial behaviors were more strongly associated with individual difference or personality factors that were not measured in the prior studies, such as familiarity with numerical concepts, financial confidence, and willingness to take risks. In Parts II and III of this series, I’ll explain why education alone fails to change people’s behavior outside the classroom.

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