Economist Justin Wolfers Says Financial Education Is Failing And There's a Big Problem. People Barely Trust Economists More Than Politicians

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Most people have never seen a germ, but they still wash their hands. Economist Justin Wolfers says that’s proof experts can convince people to change their behavior based on something they can’t see or experience directly. When it comes to money, though, economists haven’t been nearly as successful.

“Most people aren’t washing their hands when it comes to our field of inquiry,” Wolfers said during a recent speech at Stanford University’s Initiative for Financial Decision-Making. He pointed to people missing out on employer retirement matches, carrying high-interest credit card debt while keeping cash in low-interest savings accounts and paying for actively managed funds despite their higher fees.

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Many People Don’t Understand The Financial Basics

The problem starts with financial literacy. Wolfers presented data from the 2024 Financial Industry Regulatory Authority Investor Education Foundation showed that 69% of Americans correctly understood that $100 earning 2% interest annually would grow to more than $102 after five years.

But only 58% understood that money earning 1% interest while inflation runs at 2% would buy less after a year. Asked whether owning a single company’s stock is usually safer than investing in a stock mutual fund, just 41% correctly answered “false.” Nearly half said they didn’t know.

Wolfers thinks those gaps can have serious consequences over a lifetime. He compared the potential cost of poor financial decisions with economic issues that receive enormous attention from economists, including inflation and business cycles.

“We have literally hundreds of economists meeting in rooms and screaming at each other about what the [Federal Reserve System] should do next,” he said at Stanford. “And the answer is it doesn’t much matter relative to the lessons we teach.”

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Wolfers argued that financial education deserves 10 times the resources of the Federal Reserve system, enough for 10,000 Ph.D. economists.

“By the way, no part of me is joking,” he said.

But there’s another obstacle: People have to believe the people teaching them.

Wolfers cited a 2017 YouGov survey showing economists near the bottom of the list of professions Britons trusted when speaking about their areas of expertise. Just 25% said they trusted economists, compared with 51% for weather forecasters and 39% for nutritionists.

Economists beat just one group on the list: politicians, who were trusted by only 5%.

“I’ve got really good news,” Wolfers joked during his Stanford speech. “We’re ahead of politicians. And that’s it.”

‘Jargon Is a Tax’

Wolfers believes economists themselves can do something about the problem. One place to start is dropping language ordinary people don’t use.

“Jargon is a tax,” he said. Terms such as “APR” can create another barrier to understanding, while “interest rate” or simply explaining the monthly payment makes the same information easier to grasp.

“Hassle is a tax,” he added. “Shame is a tax.”

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That’s also why getting financial help shouldn’t require becoming an expert first. Advisor.com makes financial guidance available to people who don’t want to make major money decisions on their own. A roughly five-minute matching quiz connects you with vetted fiduciary professionals who fit your financial needs and can help with budgeting, taxes, estate planning and more. Once you find the right fit, you can book their services right away.

Wolfers also wants economists to stop acting like stock-picking gurus. When someone asks which stock to buy, he sees it as an opportunity to explain why last year’s winning stock picker isn’t necessarily going to identify next year’s winners.

His broader communication advice is to start with the question people actually asked, offer one lesson and one action, tell stories and talk about real people and real money.

“Dollars are what’s in their wallet, not percentages,” Wolfers said. “Listen, be empathetic and talk like a human.”

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This article Economist Justin Wolfers Says Financial Education Is Failing And There’s a Big Problem. People Barely Trust Economists More Than Politicians originally appeared on Benzinga.com

Source: finance.yahoo.com