Last word: Teaching financial fundamentals
The low level of financial literacy is a challenge for the UK and many other developed countries. It’s a problem that should be addressed at an early age, says Andrew Davies
Chairing and taking part in discussions on pensions – and our seemingly endless attempts to fix Britain’s creaking retirement system – have become a regular feature of my work over the past few years. This is hardly surprising. They are a topic of enormous interest these days, thanks to former Chancellor George Osborne’s freedoms, auto-enrolment into workplace schemes, collapsing annuity rates and so on. There’s never a shortage of things to talk about.
But one subject that seems to come up more and more regularly is our general lack of financial literacy and the role that the education system should play in addressing this widespread problem.
In the past, I’ve tended to doubt whether trying to teach financial literacy in schools is likely to do much good. It’s not that I don’t think the knowledge is valuable; it’s simply that I’m not sure how effectively it can be taught.
Many people seem both baffled and bored by most things to do with finance – how likely is it that a few hours of lessons will change their attitude or aptitude for a subject that feels complicated, scary and dull? However, recently I’ve been prompted to think again.
First, a fascinating report on financial literacy across 30 advanced and developing countries, published in October by the Organisation for Economic Co-operation and Development (OECD), demonstrates very clearly the scale of the problem we face. The survey rated respondents from each country in three areas – financial knowledge, behaviour and attitudes, with a maximum possible score of 21.
The average among UK participants was 13.1. That compares with the average score across all 30 countries of 13.2, and the average across all OECD (developed) economies of 13.7. Financial literacy everywhere is pretty low but these findings suggest that Britain lags behind even the mediocre performance of most other advanced economies. It no longer feels good enough simply to shrug and bemoan the difficulty of teaching people to be more financially capable.
The second thing that got me thinking was a discussion I attended in Glasgow, at which Robert Wright, a professor of economics at Strathclyde University, talked about this research. Professor Wright has studied levels of financial literacy among schoolchildren and adults in the UK and his account of the results is fascinating. His work focuses on three concepts that form the basis of financial literacy (and which also figure prominently in the OECD study): compounding, the difference between nominal and real returns, and diversification.
Financial literacy everywhere is pretty low but findings suggest that Britain lags behind even the mediocre performance of most other advanced economiesThe most important factor in determining whether people achieve a decent level of financial understanding, he said, is the age at which they start receiving this type of education. His view is unequivocal: financial literacy should be taught in primary schools. By the time children are at secondary school, it is already becoming harder for them to absorb basic financial concepts if they are encountering these ideas for the first time; and teaching them to adults is unlikely to be successful, he said.
You can draw a gloomy conclusion from this – that there’s not much we can do to help most working Britons become more financially capable – or you can take a more optimistic attitude and argue that important financial concepts need to be woven into the curriculum in every primary school.
I tend towards the latter view, particularly after recently finishing a wonderful book called The Marshmallow Test by Walter Mischel, an American academic who has spent decades researching self-control in preschool children. The test in the book’s title involves sitting a very young child in front of a marshmallow on a plate and telling them that if they can resist eating it for 20 minutes, they can have two marshmallows instead of one. Even at three and four, his subjects displayed very different levels of self-control and the ability to defer gratification.
But two important findings shine through. First, those with better self-control in early childhood had higher incomes and career attainment several decades later. Second (and more importantly), very young children could learn coping strategies to help them meet the challenge and master their urge to eat the marshmallow immediately. Between them, these conversations and pieces of insight that I’ve come across over the past few months have convinced me that there are concrete things we can do to improve financial capability and that we need to get on and do them. In a system that now places so much risk and responsibility on the shoulders of individual savers, it would be almost criminal not to try.
This article was originally published in the January print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.