Can good financial behavior be taught in high school? It can -- but personal finance courses are not the answer, according to a new study.


With Americans struggling to rebound from the recent financial crisis, questions of how the public manages its money have become a hot topic.  In 2010, the Dodd-Frank Act responded to these concerns by establishing the Office of Financial Education, reasoning that if individuals can learn how to make smart economic choices, we might yet avoid the next onset of rack and ruin.

English: Math class in Da Ji Junior High Schoo...

(Photo credit: Wikipedia)

At a glance, mandatory classes in personal finance seem like a no-brainer: the students learn money management; we benefit from all of the sub-prime mortgages that they don’t proceed to buy.  Moreover, high school seems an ideal milieu for this practical education: an environment which virtually every U.S. teenager will pass through, typically before they seize meaningful economic clout.    As of 2009, 44 states had leapt at the chance to include “personal finance” in their high school curriculums.

Democratization of information; intervention before catastrophe strikes; help for the one and strength in the many— while it may sound like a brilliant plan, there’s one downside: it doesn’t actually work.

While it is standard practice to offer financial literacy courses at a high school level, new research shows that these classes have no impact on whether students will grow up to commit a series of costly fiscal missteps or turn into financial superstars.  Instead, schools would do well to offer students extra math classes, according to the working paper High School and Financial Outcomes:  The Impact of Mandated Personal Finance and Mathematics Courses by Shawn Cole, Anna Paulson, and Gauri Kartini Shastry. It turns out that mathematical ability, not financial literacy, predicts economic success.

In their research, Cole, Paulson, and Shastry analyzed three datasets: the 2000 U.S. census, the Federal Reserve Bank of New York Consumer Credit Panel (FRBNY CCP), and the Survey of Income and Program Participation (SIPP).  They compared the financial histories of students who had graduated before the mandatory classes were offered against students in the same state who had graduated after the mandatory classes were offered.  Using this method, they found that mandatory personal finance classes had “no effect on investment income, the value of financial assets owned, or home equity.”  In other words, high school personal finance courses do nothing to safeguard against bankruptcy, foreclosure, and unmanageable credit ratings.

Meanwhile, the data showed that one additional high school math class reduced the probability of the students experiencing foreclosure by 0.3 percentage points (base of 9%), reduced the probability of bankruptcy over a 22 year period by 0.4 percentage points (base of 20%), and reduced the fraction of quarters the students were delinquent on their credit card bills over a 10 year period by 0.2 percentage points (base of 12%).

Historically, those in support of mandated personal finance courses point towards evidence showing an association between financial literacy and sound financial decisions.  Yet it is almost impossible to attribute financial literacy to general wealth and security, as there are so many other aspects of the problem to consider.  Financially-illiterate households tend to have less education, be poorer, and work for different employers than wealthier households, making it difficult to tease apart any of these factors as a definitive case of cause-and-effect.

The research by Cole and his colleagues provides a solid correlation between financial decision-making and overall cognitive ability.  Individuals with the lowest-measured math abilities are more likely to make a series of potentially ruinous financial mistakes.  Mathematical aptitude is a big factor in wealth accumulation, as math-savvy individuals are more likely to actively participate in their own financial matters.  Personal finance classes look to be a wash, but getting high school students to take just one extra math class could be the solution, increasing students’ ability to succeed financially, while reducing the possibility that they’ll make any number of expensive, easily-avoidable mistakes.

As the economy continues to experience sweeping changes, consumers are faced with a series of increasingly complicated choices if they wish to stay afloat and competitive.  And when we choose the wrong choice, the results can be costly.  According to the paper, 12% of U.S. households will be unable to finance a retirement that falls above the poverty lines, while another 9% will be only tuppence away from poverty.  The average amount of debt borne by households is on the rise, with nearly 50% carrying outstanding credit card balances (the average amount for which is $7,300.)  To make matters worse, households with low financial literacy tend not to plan for retirement, are more likely to borrow at high interest rates, and end up acquiring few, if any, assets.

With stakes like these, it is crucial that financial literacy programs (themselves a costly expenditure) produce results.

About the author: Anna Secino is a writer based in Northampton, Massachusetts.