The Daily Riff - BE SMARTER. ABOUT EDUCATION.

Peter Franchot is comptroller for the State of Maryland and for the past few years he has advocated adding financial literacy to the curriculum in Maryland schools. To date he has not been successful, mostly because of resistance from the education establishment in Maryland to additional curricular requirements. I am a financial literacy advocate and I agree with Mr. Franchot that more financial literacy education should be provided at the K-12 level.   I believe that more education on essential life skills improves individual decision-making and outcomes.

However, I sympathize with the educational establishment and understand why an apparently well-intentioned proposal to improve financial literacy has been rejected. Mr. Franchot's reasoning is simply wrong. It contains fallacies about the causes of the 2007-08 financial crisis and, more broadly, about the role of education in society. More education is not the cure-all for societal ills that many advocates claim. There are limits to the kinds of societal problems that education can address.
 
In fact Mr. Franchot's implication that poor consumer choices precipitated the financial crisis
 is an example of what I call a "two-headed quarter," that is misdirection away from the true cause. The political and financial establishments, of which Mr. Franchot is a member, want to draw attention away from their obvious culpability by blaming consumers for the disaster. But, consumers did not cause investment banks such as Bear Sterns and Lehman Brothers to be leveraged at multiples in excess of 30 to 1. With that amount of leverage failure is inevitable. Any adult, with any experience in any kind of marketplace, knows that the normal fluctuations in the value of any asset (stocks, bonds, real estate, commodities, merchandize, etc.) are much greater than 1 part in 30. Any person or corporation taking on that amount of leverage will be wiped out at some point in time - even if the actual investments are good for the long-term.
 
However, the people who ran these failed companies, who made financial decisions far worse than average consumers, are the most financially literate and sophisticated members of our society. Would more education have helped them?  If Dick Fuld had taken a financially literacy course before graduating high school, would he have allowed Lehman Brothers to become so over-leveraged? If Angelo Mozilo had been taught about mortgages in math class, would he have allowed Countrywide to sell millions of mortgages to people who couldn't afford to pay them back? If Joe Cassano had had a course on the basics of insurance while still in school, would he have bankrupted AIG, the world's largest insurance company, by selling products as inane as credit default swaps?
 
Obviously the answer to all the above questions is no. To use a mother's phrase, the architects of the financial crisis all "knew better," and if that is the case, more knowledge is not going to prevent future bad behavior. Financial leaders, despite their extensive knowledge of markets and investments, still made colossally bad decisions. Therefore, it is not realistic to expect that providing more financial education to average consumers will eliminate the kinds of bad choices that many made.
 
Clearly the simple act of "knowing" is not sufficient to alter behavior. Financial decision-making is just one example. There are many other bad decisions people make despite being educated to know better. Consider the incidence of smoking in the United States. It has been nearly 50 years since the release of the 1964 report by the U. S. Surgeon General on the dangerous health effects of smoking. At that time about 40% of the adult population in the United States smoked. Extensive education through schools, public service ads, and warning labels on cigarette ads and packaging have steadily eroded the incidence of smoking so that today about 20% of the adult population smokes - an apparent triumph for educators working in concert with public health officials.
 
But, 20% is still 1 out of every 5 people, or about 60,000,000 smokers in the United States. Did that many people fail to learn? At the selective private college where I teach, I observe smart, well-educated, students walking around puffing on cigarettes. I doubt that they missed the lessons in school on the dangers of smoking, or are completely blind to the ubiquitous anti-smoking public service ads.
 
In fact, smoking is a very curious behavioral phenomenon that clearly illustrates the limits of education. The oddity about smoking is that adults do not take up the habit. Almost all smokers begin the habit as teenagers. Even though it is illegal to sell cigarettes to underage persons, and the marketing is ostensibly aimed at adults, without teenagers the tobacco industry would disappear. While there is a strong correlation between education level and incidence of smoking within the adult population, clearly the decision to begin smoking has a maturity component that education cannot completely overcome.
 
So it goes with alcohol abuse, drug use, unwanted pregnancies, bullying etc., the incidence of these problems is far greater than the ignorance about them. I am certain that only a tiny fraction of the women with unwanted pregnancies are truly ignorant of how pregnancy occurs. Virtually everyone has heard about the dangers of drinking and driving. The "war on drugs" has been going on for decades with no end in site.
 
Education has made a huge improvement in the quality of life for many people, but it has its limits. It will not short cut normal human development or eliminate normal human drives. Poor decision-making persists even among people who know better. Knowing the right thing to do and actually doing it are two different things. Knowing what to do requires the simple act of remembering. Following through on a course of action is a commitment that requires a physical and emotional investment, and the allocation of time and money to actions that are often counter to innate desires. Education is good at teaching how to remember, but that doesn't necessarily result in committed courses of action.
 
The irony of the financial crisis, that Mr. Franchot blames on lack of education, is that the failed banks and investment institutions spent millions of dollars on sophisticated marketing campaigns designed to induce consumers into making bad choices. Then these same institutions were shocked, just shocked, that consumers actually bought the toxic financial products being peddled. The bankers now say that future financial catastrophes can be avoided if consumers are better educated and informed on financial decision-making. But if knowledge is the solution, why didn't it work for the bankers?
 
Knowledge is necessary for sound decision-making, but it is not sufficient. Not every societal problem can be solved by forcing students to sit through another class and pass another exam. The political and corporate leaders who argue for education as a solution should examine their own assumptions and culpability for the problems they want solved.  If "knowing better" didn't work for them, what makes them think it will work for everyone else?