Some clues can be derived from last year’s Financial System Inquiry report, where it states in chapter four: “Improved financial literacy enables consumers to be more engaged and to make more informed decisions about their finances.” Importantly, however, immediately above this, the report states that financial institutions should have regard to “consumer behavioural biases”.
There’s a clue here as to what financial literacy is really about – or should be about.
Reference to an online dictionary reveals a definition of ‘financial’ as: "refers to money matters of some importance". ‘Literacy’ refers to "a person’s knowledge of a particular subject".
Financial literacy education therefore provides information about money matters that should improve a person’s knowledge.
But here’s the thing: information isn’t knowledge and knowledge isn’t wisdom.
Reading about something, gathering general information about it and even believing that you understand it doesn’t necessarily produce satisfactory outcomes, particularly when the impact of a decision is important and may be made in a heightened emotional atmosphere.
For instance, if I’d read a book called Heart Surgery for Dummies, I’m not sure I’d feel comfortable about performing a DIY cardiac procedure and expecting a satisfactory outcome!
The real reason for increasing the levels of so-called financial literacy is to produce better consumer outcomes by having consumers make better, more appropriate decisions. Both of these concepts inevitably involve behavioural modification on behalf of consumers.
Financial decisions are quite often made in relative haste and in a heightened emotional atmosphere. Even large and important financial decisions, such as a home purchase or home loan, can be made quickly, particularly in a ‘hot’ housing market and with a finance industry geared toward ensuring the speedy conversion of an applicant into a borrower.
Put another way, particularly in the housing finance field, a consumer behavioural bias is to act in haste and repent at leisure.
A general level of knowledge about ‘money matters’ won’t necessarily produce optimal outcomes for consumers in the complex area of residential housing finance. What is required are tools that bring about behavioural modification – consumers should be required to approach a finance decision responsibly when equipped with the essential knowledge requirements that relate specifically to that decision.
As has been noted elsewhere, there’s little point teaching sex education to five-year-olds. There’s a lack of context, relevance and proximity!
There’s ample evidence from research studies in the US that broad-based school or university financial literacy programs have little impact on financial decisions made subsequently. The ‘failure’ rate in later years was about the same for those who’d undertaken the education as for those that hadn’t.
Genuine financial literacy education should equip people, when a finance decision is imminent, to consider whether the finance sought meets their needs and objectives, is suitable for them and can be repaid without substantial hardship. Sound familiar?
The most significant behavioural modification required is to ensure that consumers take greater responsibility for their own decisions and choices, and do not seek to lay the blame for poor choices onto others.
Specific financial literacy education, made near to the decision and – for maximum impact – made compulsory would assist in modifying consumer behaviour to address the responsibility shift that is required.