Rethinking Financial Education: When Is It Effective?

In 2013, I read a research paper that made our firm completely rethink the role and value of Financial Education in the workplace. The paper is entitled “Financial Literacy, Financial Education and Downstream Financial Behaviors“ by Professors Daniel Fernandes, John Lynch, and Richard Netemeyer. The paper reviewed the relationship of financial literacy and financial education and their effects on changing financial behaviors. 

The authors basically said, that although financial education and financial literacy are laudable goals, most efforts to educate people to be more literate with their financial decision making is many times not very productive.  Essentially most financial education programs had little to no effect on changing financial behaviors.  


Excerpts from the abstract of their paper reads as follows:

“Policy makers have embraced financial education as a necessary antidote to the increasing complexity of consumers’ financial decisions over the last generation.

We find that [education designed] to improve financial literacy explains only 0.1% of the variance in financial behaviors studied, with weaker effects in low-income samples.

Like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention. ……

Financial education as studied to date has serious limitations... We envisage a reduced role for financial education that is not elaborated or acted upon soon afterward. We suggest a real but narrower role for “just in time” financial education tied to specific behaviors it intends to help. ……” 


The reality is that normal humans do not have a long retention of almost anything financially related that was taught to them.  Basically, we forget what is taught to us if we do not regularly use that knowledge shortly after obtaining it.    Moreover, if we do not make a financial decision on a regular basis, we are less likely to feel comfortable making that decision in the future. 3

When does Education Work? When it is timely and specific

The authors did find techniques that can make education effective at changing behavior in certain limited and narrow circumstances.   They used a term called “Just-In-Time” education.  Basically, financial education has a better chance at changing financial behaviors when it:

  1. Is provided “just-in-time” or right before a financial decision is made and;
  2. The issue the education is addressing is specifically relevant to the person receiving it. 

This just-in-time approach is limited in its effectiveness because many big financial decisions are made sporadically throughout life.   Accordingly, providing financial education in a just in time matter is more difficult to do. 

Buying a home with mortgage financing, buying an automobile, or deciding if you use a low or high deductible insurance plan are just a few examples of the type of sporadic financial decisions that have large implications on our future financial dignity/health.   Attending a financial course on any of these subjects is not likely to help us make better decisions unless the course happens to be right before those decisions are made. 

I have found that I have been the proverbial wet blanket when I bring this paper up to talk about the ineffectiveness of a lot of the financial education that is provided to employees.   There is a whole bunch of folks in our industry and within HR departments that still believe that education can be a productive way of changing financial behaviors.  Sadly, it usually doesn’t.   

So what is a plan sponsor or advisor to do?   I would first recommend getting a better understanding of how most humans make decisions and process information.  You can learn a lot from the insights we have received from behavioral economics. Danial Kahneman and Richard Thaler have both won Nobel prizes, in part because they have showed how we should be rethinking on how people think. 

The reality is our old rationalistic economic approach to education is usually wrong.  Studies from behavioral economics help us better understand how people process information and make decisions. In the future I will be presenting more posts discussing the research from behavioral economics and how we can use this research to help people make better financial decisions.   I encourage you to have an open mind and rethink how we engage with people.   Ultimately, we can make it a lot easier to have people obtain a dignified financial future.   

(Re)think by Channel Financial 
A blog series challenging the retirement industry to 'rethink' conventional wisdom and "the way we've always done things" in the interest of helping people save. With a foundation in behavioral finance, topics are relevant to professionals striving to improve outcomes for all.

Matt Gulseth on July 11th, 2019

Posted by Matt Gulseth

Matt Gulseth's primary role is to help organizations improve employee outcomes in their retirement plans with less effort and less cost while managing risk. He helps companies apply powerful behavioral finance strategies. Channel Financial is a Resources partner firm sharing ideas, tools and talent to the benefit of investors.

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