Dilip Soman

Why financial literacy should be taught in every school: U of T expert

rasbachn — Wed, 06 Dec 2017 17:06:55 +0000

Why financial literacy should be taught in every school: U of T expert rasbachn Wed, 12/06/2017 - 12:06

Cutline

B.C.‘s ambitious new school curriculum includes mandatory financial literacy instruction within math courses at every grade level, starting from kindergarten (photo by Shutterstock)

Dilip Soman

Topic

City & Culture

Finance

Rotman School of Management

The Conversation

Subheadline

The Conversation with U of T's Dilip Soman

1. What would you do if you spotted a wild animal in your proximity?

2. If you know that inflation forecasts were one per cent lower than actuals and commodity bundles would cost two per cent more than expected, how much more should you save every year so that your retirement quality of life is not compromised?

If you had quick answers to the first question but were not sure about the second, you are not alone. Several years ago, when our ancestors lived in rudimentary dwellings and had a barter economy, their decision-making primarily focused on questions like the first.

As our society has evolved and our economy has become more complex, we have to deal increasingly with questions about debt repayments, retirement savings, budgeting, mortgages and lines of credit.

And yet, the human brain has evolved over hundreds of years with the goal of survival. The more civilized and developed we have become, the more we are asking our brains and its associated apparatus to do what it was simply not designed to do.

Finance is non-intuitive for humans

Financial capability is one domain in which the inadequacies of humans are particularly stark. Changes in the financial landscape over the past 20 years have taxed our cognitive capabilities to new levels.

In the United States and elsewhere, the move to defined contribution pension plans rather than defined benefits has put citizens in the driver’s seat for making contribution and investment choices.

Rising costs of education also require families to plan better. An increase in the number of options and complexity of financial products ranging from mortgages, loans, investment options and credit cards require citizens to be even more knowledgeable about their features.

And easy access to credit means that citizens have to make decisions about allocating consumption over time – a relatively new skill that wasn’t needed in the pre-credit era.

Finally, finance is non-intuitive to the human brain. Research has shown that people consistently fail to grasp the impact of compound interest or ongoing expenses on their well-being.

The financial inclusion challenge

So, how well do we do on financial capability? A 2011 study entitled Americans’ Financial Capability painted “a troubling picture of the state of financial capability in the United States. ... The majority of Americans do not plan for predictable events such as retirement or children’s college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks.”

In Canada, the news was equally dim. The 2010 recommendations of the Task Force on Financial Literacy, set up by the federal government, found that financial capability in Canada was no better than other countries. A total 31 per cent of Canadians were struggling to meet their bills and payments.

The task force also found that the diversity in our country makes financial inclusion challenging. “Aboriginal Canadians,” “young adults,” “very recent immigrants” and “low-income and low-net-worth households” were the categories of people found to be struggling just to make ends meet.

In writing about the importance of financial literacy, the task force wrote: “It is more than a nice-to-have skill. It is a necessity in today’s world – and, moving forward, should be treated as such by policy-makers, educators, employers and other stakeholders across the country.”

Fixing the handicap

Over the past seven years, efforts in Canada and elsewhere have focused on improving financial literacy and helping citizens make better financial decisions.

The Financial Consumer Agency of Canada (FCAC) has led the charge in creating a culture of a financially literate Canada. The news is encouraging – there have been demonstrated improvements in financial capability and Canadians seem less stressed about their finances.

Yet, there is much work to be done. As the adage goes with any behavioural change challenge: It is relatively easy to make a change, but sustaining and growing the momentum are more difficult.

(photo by Shutterstock)

In particular, efforts have focused on teaching Canadians critical skills at the right time. This includes efforts such as “just-in-time” financial literacy and guidelines or “rules-of-thumb” to make better choices.

In the language of the behavioural sciences, these efforts are referred to as rebiasing efforts. Rebiasing simply refers to fighting one form of cognitive handicap with an intervention that may not necessarily fix the handicap. Giving people a rule of thumb to make better mortgage decisions doesn’t help them understand the theory of mortgages any better, it just helps them choose.

On the other hand, debiasing refers to interventions that truly fix the handicap. When confronted with a mortgage, for instance, a debiased citizen might truly think in terms of interest rates, net present values and budgeting for payments rather than relying on a rule of thumb. It requires a fundamental mindset shift! It requires ongoing training and practice!

Financial literacy in schools

What better place to change mindsets of future citizens than our schools and colleges?

The Organization for Economic Co-operation and Development (OECD) runs a program called the Program for International Student Assessment (PISA). Since 2012, this program added financial literacy to its assessment of math, science and reading in 15 countries (including seven Canadian provinces).

The measurement of these skills are essential – after all, it is difficult to impact something that can’t be measured. Critical to success in these initiatives is a curriculum that allows kids to make financial decisions and get feedback in a safe space.

This can be done through a combination of traditional classroom activities, technology enabled games and some limited real world practice.

Most Canadian provinces and territories embed financial literacy in their school curricula to some degree. The financial education children receive, however, varies significantly depending on where they live.

British Columbia stands out: A new curriculum includes mandatory financial literacy instruction within math courses at every grade level, beginning in kindergarten.

The need for “street smarts”

Results from PISA show that teaching financial capabilities in schools does have a significant and positive impact on financial decision-making by 15 year olds.

The boost from school programs is especially significant in cases where there are high levels of parental involvement and when capabilities are developed through practice (either in simulated or real bank accounts) rather than through mere lectures.

The study – which included data from seven Canadian provinces, and in which Canada ranked third, after China and Belgium – also shows that socio-economic status matters. It shows that while numeracy (being able to compute interest rates etc.) is important, it is definitely not sufficient.

Being “street smart” about things such as recognizing that some deals really are too good to be true, understanding the role of income tax or being vigilant for fraudulent e-mails also play an important role in financial capability.

A financially trained citizen base

Developing a financially literate and fair marketplace has three large building blocks:

Financial literacy for adults who need it now.
Behaviourally informed regulation that ensures a fair marketplace.
A citizen base that acknowledges the centrality of financial capability to well-being and is trained to think financially.

We have made inroads into the first two of these three blocks, and it is now time to tackle the third.

Dilip Soman is a professor and co-director of Behavioural Economics in Action at Rotman (BEAR), University of Toronto

This article was originally published on The Conversation. Read the original article.

What trick-or-treating tells us about human nature: U of T expert

rasbachn — Mon, 30 Oct 2017 19:18:27 +0000

What trick-or-treating tells us about human nature: U of T expert rasbachn Mon, 10/30/2017 - 15:18

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Behavioural scientists say trick-or-treaters can give us insight into human psychology (photo by Shutterstock)

Dilip Soman

Topic

City & Culture

Rotman School of Management

Subheadline

The Conversation with University of Toronto's Dilip Soman

Carved pumpkins, flickering candles with spooky shadows and children dressed up in their Halloween finery will soon be at our doorsteps.

And while Halloween is always an exciting time for candy manufacturers, costume sellers and youngsters who are often allowed a small binge in candy consumption, a different group of people also lick their lips in anticipation – behavioural scientists.

Experts in behavioural science, like me, are often looking for ways to study human choice in natural habitats. We’re often constrained in our experiments at university psychology laboratories when participants come into a sterile environments and make choices on a computer screen.

But on Halloween, we have a steady flow of people willingly coming to our doorsteps.

So what do trick-or-treaters tell us about human psychology?

The first interesting Halloween finding suggests that humans tend to want to diversify, and as a result they end up choosing variety even when they don’t particularly like it.

In a U.S. study published in 1995, two households collaborated to allow trick-or-treaters to choose a pair of candy bars from two large stacks of Milky Ways and Three Musketeers.

How candy was offered affected choice

However, the manner in which the choice was offered was different across two groups. In one group, kids made one choice at one home, and then another choice at the next home. In the second group, kids were asked to choose any two candy bars at the same time.

Researchers George Loewenstein and Dan Read found that when they chose their two candy bars one at a time, kids tended to choose the same candy bar – presumably the one they liked. When they chose two at the same time, they diversified.

Interestingly, other researchers found similar effects in shopping behaviours.

Itamar Simonson and Russell S. Winer found that when people plan their lunches for the upcoming week, they tended to buy a diverse assortment of meats and yogurt. But when they bought lunch one day at a time, they often ended up eating the same turkey sandwich and strawberry yogurt every day.

And investors tend to naively diversify when they plan their portfolios. Naive diversification happens when investors blindly spread their assets across all the options available to them, without regard to what those options are.

Candy and politics?

We can also learn a thing or two about political affiliations, healthy eating and incentives from how kids behave on Halloween.

Julian Jamison and Dean Karlan studied candy choice on Halloween prior to the U.S. presidential elections in 2008 and 2012.

In a home in New Haven, Conn., two tables were set up on a porch at the top of a flight of stairs that trick-or-treaters climbed to claim their loot. One table was festooned with Republican campaign material and the other with Democratic material.

Kids were asked to choose one of the tables to collect their candy. In some cases, kids were told that both tables would each hand out one bar of candy, and in this circumstance the majority of the kids went to the Obama table.

In other cases, kids were told that the Obama table gave out one piece of candy while the Republican table gave out two. The majority still chose the Obama table, and it seems to suggest – mercifully – that it takes more than an extra bar of candy to sway supporters.

However, when the researchers analyzed the data by age, they found that older kids (ages nine and up) were much more swayed by the extra candy than the younger ones.

The relatively bad news about the older kids is balanced by some good news.

Michelle Obama speaks at a Let’s Move! program for 400 children in Clinton, Miss., in 2013 (photo by Rogelio V. Solis/AP)

In another experiment, Karlan and his colleagues offered kids the choice between candy and fruit. Some kids made the choice against the backdrop of a large Michelle Obama poster promoting her “Let’s Move” campaign aimed at encouraging kids to eat healthy foods and exercise. The poster did shift choice towards fruit, more so for the older kids than the younger kids.

Behavioural science tells us that in making choices, small elements of the context – whether the choice is made sequentially or simultaneously, whether there is a background poster or a festooned table – influences the choices.

Halloween has taught us a thing or two about human nature that goes beyond candy choice. For the creative and diligent behavioural scientists among us, Tuesday evening gives us yet another opportunity to study human nature. For the rest of us, it’s time to stock up on the candy, carve those pumpkins and practise your scariest “boo!”

Dilip Soman is a professor and co-director of Behavioural Economics in Action at Rotman at the University of Toronto.

This article was originally published on The Conversation. Read the original article.