The chicken or the egg (or evolution)?

Yesterday I wrote about a phenomenon that pointed out “that investors who made written plans by the time they were 40 years of age wound up with 5 times as much money by age 65 as those who didn’t have written plans” (Fortune Magazine, 1999). However, I felt that this occurrence was due to another factor: A person’s own willingness to be actively involved in their finances.

This made me think about an article in Money magazine (August 26, 2008) that rubbed me the wrong way. It was an article highlighting Law professor Lauren Willis and her belief that you can’t teach financial literacy. Excerpt:

Question: What's so bad about financial education?

Answer: It doesn't work. Sellers of financial products spend billions drowning out
well-meaning messages to consumers from nonprofits or government
agencies.
Also, financial products are always changing - credit and insurance
products have changed dramatically in the past 20 years - making it hard for
educators to keep up.
…
Teaching them is a waste of money. Studies show that sending people to either high school personal-finance classes or adult retirement seminars does not result in better financial behavior.

Anyone else have the hair on their neck standing up? This article got a lot of bad press, and negative reactions all around.

I kinda dismissed this article thinking: look at me! I’m learning financial literacy! I can do it, and so can everyone else!

However, months later, it’s still (obviously) rumbling around in my head.

I have to wonder if this too has a chicken and egg conundrum. Perhaps financial literacy can’t be taught to those who have no interest in it, or shouldn’t be taught to those who want to learn get-rich-quick schemes. Financial literacy can be taught, but only to those who want to learn about the basics.

In Psychology, we call this a third-variable or latent variable problem. When a statement holds up as true, but not because of the statement itself, but rather because of some extraneous factor.
Let me give you an example: Shark attacks and ice cream sales go hand-in-hand. When shark attacks increase, so do ice cream sales. This is a true statement. However, it’s pretty apparent that shark attacks do not cause people to crave ice cream (help, help me! I’ve been bitten- and I need Ben and Jerry’s!).

No, instead it is the temperature of the weather that increases both attacks and sales. When the weather is hot more people are likely to go to the beach (and therefore increase their chances of being attacked by a shark) and more people desire a cold, frosty treat when the mercury rises.

(Another puzzle for you: violent crime and church attendance go hand-in-hand. When there is more crime, more people attend church. This is a true statement, but why?)

I bet what Law professor Lauren Willis said was true. In general, you can’t teach financial literacy. Increased knowledge about finances leads to worse financial behaviors. However, it’s not the knowledge itself that is the problem, instead it is the demographic: the general public. The general public may not have a true interest in the subject or possibly they only want to do the cool, over-hyped, get-rich-quick schemes.

There is a demographic that is the exception to this rule. This exception is the personal finance community, a group of people who have taken on just this task, and are probably a lot better at it than the general public. Which is, of course, Money magazine’s target demographic.