In 2012, the Boston Fed’s Financial Capabilities Group initiated a review of recent literature on the value of financial education to financial literacy and economic outcomes. This is the first in a series of four posts summarizing the review findings. The complete series will be published on the Bank’s Education Resources page.
Suppose you’re an educator with a goal of helping students develop good financial habits. How do you go about fostering their understanding of the world’s increasingly complex financial system and their own place within it? Intuition says that a complex system requires complex education, right? While there’s no single, failsafe strategy for preparing individuals to make sound financial decisions, recent studies reveal that simpler may be better, or “less is more” when it comes to embedding constructive financial behaviors.
Alejandro Drexler et al. conducted a randomized experiment comparing two methods of financial accounting instruction given to clients of a microfinance institution in the Dominican Republic. The first was a traditional method that covered the fundamentals of accounting and provided a comprehensive understanding of financial principles. The second method used easily applied decision rules without explaining the underlying accounting motivations. Drexler’s results showed that participants who were taught the simpler “rules of thumb” were about 10 percent more likely to implement the course lessons, calculate monthly revenues, and keep separate business and personal financial records than either the control or the principles-based group. The rule-of-thumb group also had a 30-percent increase in the level of sales during slow weeks and a 6-percent increase in savings. The principles-based training produced no such significant effects.
There were improvements in the savings and record keeping of some participants in the principles-based group, but only for individuals who were already highly educated. Conversely, education level had no marked effect on participants in the rule-of-thumb method. What this seems to suggest is that the average person doesn’t effectively retain or utilize theory-based training. Less is more. As content providers tailor education offerings to the needs of different populations, they should consider these findings.
Other research looks at simplification from an organizational standpoint. For example, Sweden introduced an annual pension statement called The Orange Letter. The one-page summary of an individual’s income stresses the link between lifetime earnings and benefits (Almenberg, 2011). Lusardi (2008) shows that with the right design, retirement plans with a default “opt-in” help people save for their future with minimal effort. Furthermore, allocation suggestions could be customized for individuals according to age, number of children and earnings, reducing the complexity of these decisions. Sweden’s government-run pension system uses some of these broad investment strategies to provide basic guidance to participants. Favorable outcomes were noted with a default opt-in plan in which the level of investment in stocks automatically declined with time, minimizing the risk of substantial savings loss near retirement. The bottom line: commonsense defaults and thoughtful customization of options in certain financial benefits could mean fewer decisions to make—or put off making—and better financial outcomes. Another case of “less is more.”
In the end, evidence is mounting for the benefits of simplification techniques on financial education and on current mechanisms for making some of our most important financial decisions. For educators specifically, applying a direct, plain-language approach to content design and delivery could help make financial education more approachable to their audiences and more apt to foster behaviors that lead to improved financial outcomes.
Financial educators looking to simplify their message may find the Plain Language Resource Guide helpful. Although the guide is aimed at health literacy—which is closely related in many ways to financial literacy—it provides links to numerous web pages with general tips for designing content that is clear, to the point and focused on its target audience.
This research was conducted by Michael Corbett of the Boston Fed, who cowrote the series with Suzanne Cummings.