Financial Education, Financial Competence, and Consumer Welfare

December 2017

Economists typically gauge the value of financial education by examining how it affects consumer behaviors. But the best financial choices for consumers depend on a mix of objective facts and subjective judgments – and one size rarely fits all.


Financial education in the workplace tends to be brief and laden with motivational rhetoric. Prior studies of such interventions have focused on knowledge acquisition and behavior change, but the criteria used to measure beneficial outcomes suffer from serious conceptual and practical limitations. This study, in contrast, employs a novel method for assessing the quality of post-intervention decision making. The authors focus on mistakes arising from misconceptions about opportunities, while also accounting for underlying differences in individual preferences.

Key Insights
Conventional criteria for evaluating financial education interventions can yield misleading conclusions about the intervention’s effects on decision making.
The substance of financial education, as opposed to the rhetoric used, accounts for performance improvements on literacy tests.
Motivational rhetoric drives behavior change, but rhetoric can have the unintended effect of distracting from substance and promoting an indiscriminate one-size-fits-all response.

The authors conducted two research projects concerning, respectively, compound interest and portfolio allocation. Both projects involved experiments with similar designs. Subjects were asked to make incentivized decisions after viewing an educational video that differed between treatment and control groups. The subjects were then tested on their knowledge of the targeted topics and given a survey to elicit attitudes, self-reported decision strategies, and other information. The two experiments involved different subject pools in different settings, and each employed varying degrees of abstraction in decision tasks, yet both experiments yielded similar results.