Financial Literacy: Just-in-Time Is the Ticket
Published on Mar 14, 2016
Financial-education efforts have had depressingly little impact on individuals’ decision-making when occurring too far away from the financial behavior it’s meant to influence, says University of Colorado’s John Lynch.
Financial Literacy
0:03I am Christine Benz for morningstar.com I’m here at the morning start
0:07institutional conference recent research has some sobering implications for
0:11couples financial decision-making process he’s joining me to discuss that
0:15topic is john Lynch he’s a professor at the University of Colorado John thank
0:20you so much for being here thanks Christine you have done some really
0:23interesting research there has been a lot of research done over the past
0:27several years about financial literacy education whether it works whether it
0:32doesn’t work the general take away is not encouraging its not encouraging
0:37whether database Lee show is that the first place the average American
0:41consumer is extremely low and financial literacy so if you give the average into
0:47a national survey you’ll see very simple questions about compound interest you
0:52know about about time value of money etc that most people don’t know that stuff
0:58so financial literacy is low and then educational efforts to help lift people
1:03up in that area haven’t necessarily been successfully either yeah that’s the
1:07interesting thing that sort of that the national thing the natural response when
1:10you see the world has become more complicated and people need to be more
1:14literate natural responses they’ll fix the problem by financial education and
1:19we’ve done research that shows depressingly small effects of financial
1:24education that financial education has been very very little effect on
1:27financial behavior and whatever effect it has happened if the education is
1:33close in time to the financial behavior trying to you so that gets to this idea
1:39of what what you call just-in-time financial education let’s talk about
1:44what that means and why you think it can be more effective than sort of general
1:48interest financial literacy curriculum ok so you know when I say this is gonna
1:53sound painfully obvious but the financial education is no different than
1:57other forms education if you don’t use it goes away and so on
2:02much financial education for example school be spent on education has them to
2:07a broad based curriculum in the recipients that education aren’t in a
2:13position to use it right away they have no money no assets to my be teaching
2:17high school kid ok of course there’s a mortgage etcetera and so what our
2:22research shows that there is no impact of financial education of any link on
2:28behavior that’s outside of two years from when you did it finish the
2:32education so if you’re hoping you gonna teach somebody something that’s gonna
2:35stick with them into adulthood etcetera that turned out to be a fantasy but if
2:40you get a little closer to the point of decision making you deliver that
2:43education at the time when someone is considering their choices whether
2:47they’re taking out a mortgage or allocating a 401k it may have the
2:51potential to be a little more effective
2:53that’s exactly right that’s exactly right so you’ll see that you know if
2:57you’re looking at the effect of like a one hour session on behavior that’s
3:00taking place within a month compared to having like 15 hours of the person
3:05looking at behavior that’s a year down the road the short session can be just
3:08as effective if it’s right away so part of what we think is that to try to
3:14identify and people’s financial lives specific events where you know you can
3:18be just in time
3:19you know for example let’s say somebody who’s about to retire and they’re
3:22thinking about the issue of accumulation and think about annuities and so on so
3:27that’s a point in time where they’ll be receptive to financial education and
3:31financial education embedded in some kind of advice small ok when you have
3:38pursued in your research I think it’s an interesting one for our morningstar.com
3:42audience is couple’s financial planning decisions and the fact that in many
3:48couples they divide and conquer the stuff that they need to get done and so
3:53in many households you’ve got one partner who’s the mean financial
3:56decision-making maker and the other one is concentrating on other things what
4:00implications does that have for that household ok well said that’s you know
4:05that’s an extremely interesting so first of all almost everything has been
4:09written about financial education of financial literacy looks at the
4:12individual adult is the unit of analysis so they’re looking at them now they’re
4:16analyzing me they’re saying john Lynch is this age got this income etc but the
4:22point of this later project is that that people are making decisions in a social
4:28context in particular in the couple context and we find these super
4:32interesting result we find in the first place when couples first get together
4:35the person who typically divide up the responsibilities for various tasks
4:41including money in the person who gets the money job is absolutely no more
4:45capable than the person who doesn’t get so it’s random random this I would say
4:48random but there are I’m sure there are good reasons for it but it’s like if I’m
4:52bad at cooking then I went up being the money personally I think so or something
4:59like that so
5:00they’re interesting result we find those the ones the couple has divided up those
5:04responsibilities whoever is in the call the kind of the driver’s seat
5:09financial driver seat gets better and better and better over time in financial
5:13literacy and ironically the person who’s in the passenger seat by the way my
5:18marriage that’s me the longer you’re together the worse and worse for the
5:22lower and lower your financial literacy becomes and then we are evidence shows
5:26that plays out in inability of individual to make financial decisions
5:31have separated from their partners so if i’ve been relying on my wife for close
5:37to forty years and that over time even though that seems like it’s working well
5:42for me when I can Ryan her if my own I do worse and worse and worse the longer
5:47we’re together and I do badly but even when I’m in a situation where I have
5:53access to really valid information to help me make a particular decision if
5:58I’ve been in this passenger seed I’m so I mean level of ignorance I literally
6:03cannot engage that material and so I think it’s very interesting for people
6:06in the financial advising space for example about you know how do you get
6:10through to somebody who was a passenger seat for so long
6:13where they literally have a difficult time following just paying attention to
6:17what you’re talking about their right so what are some best practices for couples
6:22who are in this situation and I know anecdotally that it’s very calm and the
6:26couple’s to divide and conquer this way how can they help ensure that the one
6:32who is not in the driver seat that that person skills don’t completely go fallow
6:37during that period but will soon as I actually listened to another talk in the
6:42conference that the Bobcats game and it was about to just mentioning how couples
6:47find it aversive to make financial decisions together so her her point was
6:53that people find it easier to divide and conquer one personal make the decision
6:56I think if you can make yourself engage if there’s some big elaborate on that
7:01kind of thing then so that you will cover the couple completely understand
7:05what’s going on and why we’re doing and so on I think that’s that’s going to be
7:09a positive for people in the long run again our messages as long as the
7:14couples together the divide-and-conquer isn’t a problem but since it’s quite
7:20likely that you know marriages end in divorce or death will partner and so on
7:23eventually the person the passenger seat is gonna be on his or her alone and so
7:28we try to think about well what’s going to happen then right and I’d like to
7:32discuss that because I know in many situations the couple’s answer is well
7:36he or she will hire an advisor to take things over at that point but that’s not
7:41as simple as it sounds in that the person who hasn’t been the financial
7:45decision maker may not be well equipped to choose a good adviser that’s exactly
7:50right so basically so you know BC need to know something to be able to screen
7:54and know who really is trustworthy and also just to understand the advice to be
7:59able to act on it and so if you’re if Ben if you’ve been relying on your
8:05partner for so long and now you don’t have your partner so now you’re relying
8:08on a financial advisor it doesn’t look like that pretty but picture at the I
8:13would say that people are definitely at risk of having some disastrous financial
8:17decisions that situation so would one idea be for the financially active
8:22partner to maybe help pre-screen advisers to identify appropriate
8:26advisors in advance yeah I think that’s an interesting illegal one of those is
8:30also porous obviously just what the compensation model for the analyzer and
8:33so on and so you know there are compensation models words for you only
8:36versus some other commission based thing so maybe conversations about exactly
8:41that he comes to that situation is categories will buy them I prefer over
8:45others but but I agree with you that but then beyond that there’s going to be
8:50actual investment decisions and so on and so basically it
8:55it’s one implication is that you can’t be so just you can’t say just-in-time
9:02financial education for forty years and then hope that in forty years now it is
9:07just in time I need to know what I’m doing to talk to my advisor and hoping
9:12to catch on right away was a this one positive thing in this is there is some
9:17evidence that when when when when Parker’s know that something’s about to
9:22happen for example they have a partner and so you know that you’re gonna be
9:27there is evidence that people who’ve been in the passenger see
9:31up their game and get to the point where they’re they’re able to cope more
9:35effectively I would say that’s another implication of this if you’re in a
9:39couple of you it’s a health issue that like that
9:44getting to it later is better than getting to it never and so used as a
9:49catalyst think you such an important topic we appreciate you being here to
9:54discuss your research with it
