- How would you react if you were to see wild animals near you?
- If you’re aware, the inflation projections for this year were 1 percent less than what actually happened, and commodity bundles cost two percent more than anticipated. What can you save each year to ensure your retirement lifestyle isn’t compromised?
If you have quick responses to the first one but weren’t sure about the second, you’re not all on your own! In the past, when our ancestors were living in basic dwellings and used barter economies, the majority of their decisions were based on the same questions as the first.
Since our world has changed while our economies have become increasingly complicated, we are confronted more frequently with questions regarding how to repay debt as well as budgeting, retirement savings, mortgages, and lines of credit.
Yet, the human brain has changed over hundreds of years to meet the intention of surviving. The more sophisticated and civilized we’ve become, the more we’re putting pressure on our brains as well as the apparatus to perform tasks it was not intended to do.
Humans do not have a clear understanding of finance.
Financial capabilities are one area where the deficiencies of humans are evident. Changes in the world of finance in the last 20 years have strained our cognitive capacities to new heights.
In the United States and elsewhere, the shift to defined contribution pension plans, rather than defined benefits, has put the citizens in charge of making decisions about investments and contributions.
Higher costs for education require families to be more prepared. A growing amount of options and the complexity of financial instruments, including mortgages and loans to credit cards and investment options, make it necessary for citizens to be more informed about their benefits.
The ease of access to financial services means consumers must make choices about how to allocate their consumption over time, an entirely new skill that wasn’t necessary prior to the age of credit.
In the end, financial concepts are not intuitive in the human mind. Studies have shown that humans frequently do not grasp the effects of compound interest or continuous expenses on their overall health.
The challenge of financial inclusion
How do we measure our ability to finance? A study in 2011 called Americans Financial Capability revealed “a alarming image of the current state of financial capabilities within the United States …. A majority Americans don’t plan for predictable events like retirement or college tuition for children. The most important thing is that people don’t plan for emergencies and unexpected events which leaves them and the economy vulnerable to economic sudden shocks.”
In Canada, the situation was just as dim. The recommendations from 2010 from the Task Group on Finance Literacy created by the government of Canada concluded that financial capacity in Canada did not fare as well as in other nations. In total, 31 percent of Canadians struggled to pay their obligations and bills.
It also discovered that the variety of our country can make financial inclusion difficult. “Aboriginal Canadians,” “young adults,” “very recent immigrants,” and “low-income and low-net-worth households” were the main categories of households that were found struggling to get by.
In a report on the significance of financial literacy, the task force said: “It is more than an important skill to have. It’s a requirement in the present world and, as we move forward should be treated as such by policy makers teachers, employers, educators and other players across the nation.”
Resolving the handicap
In the last seven years, the efforts of Canada and around the world have been concentrated on increasing the financial literacy of citizens and helping them make better financial choices.
The Financial Consumer Agency of Canada (FCAC) has been at the forefront of creating an environment that is financial literacy Canada. The good news is that there have been tangible improvements in financial literacy, and Canadians appear less stressed about their finances.
However, there is a lot of work to be completed. It is the same with any behavioral change challenge. It’s relatively simple to implement a change; however, maintaining and extending the momentum is more challenging.
Particularly, efforts are focused on training Canadians in crucial skills in the right way at the right moment. This includes initiatives like “just-in-time” financial literacy and guidelines or “rules-of-thumb” to make better decisions.
In the context of behavioral research, these efforts are called “rebiasing” actions. Rebiasing is the process of tackling a cognitive impairment of one kind by implementing an intervention that might not always be able to fix the issue. The idea of giving people a guideline to make better mortgage decisions won’t make them comprehend the theory of mortgages better, but it does help the borrower choose.
However, debiasing is a term used to describe interventions that actually eliminate the disadvantage. If faced with the prospect of a mortgage, for example, the debiased person could be able to think in terms of rates of interest net present value and budgeting for payment instead of using the general standard of thumb. It is a major mindset change! It requires continuous training and regular practice!
Schools teaching financial literacy
What better place to alter the habits of future citizens than in our colleges and universities?
The Organisation for Economic Co-operation and Development (OECD) has an initiative called”the Programme for International Student Assessment (PISA). From 2012 onwards, the program has also added the concept of financial literacy to its assessments of science, math, and reading across fifteen countries (including seven Canadian provinces).
The assessment of these skills is crucial — after all, it’s difficult to influence something that cannot be assessed. Essential to the success of these programs is a program that allows students to make financial decisions and receive feedback in a secure environment.
It can be accomplished through the combination of classroom exercises that are traditional as well as games that are technology-enabled and limited practice in the real world.
The majority of Canadian regions and provinces incorporate financial literacy into their educational curriculum to some extent. The education provided to children in financial literacy, nevertheless, varies significantly depending on the area in which they live.
British Columbia stands out: A brand new curriculum includes mandatory instruction in financial literacy in math courses throughout the grade levels beginning in kindergarten.
The necessity of “street smarts.”
The results from PISA demonstrate the fact that teaching financial skills in schools has an impact that is significant and positive on the way 15-year-olds make financial decision-making.
The benefit of school programs is notably important in situations that have high levels of parental involvement as well as when skills are developed through practice (either in real or simulated bank accounts) instead of through simple lectures.
The study comprised information from seven Canadian provinces, and Canada came in third place, just behind China and Belgium. The study also shows that socioeconomic status can be a factor. The study shows that although numeracy (being capable of calculating interest rates, etc.) is crucial, however, it isn’t enough.
The ability to become “street smart” about things like recognizing when deals are too amazing for their good, knowing the importance of income tax, or being alert for fake e-mails are also important in financial security.
A financial-trained citizen base
A financially informed and fair market has three main components:
- Adults who need financial literacy require it today.
- Behaviourally-informed regulation that ensures a fair marketplace.
- A base of citizens who recognize the importance of financial capacity to health and wellbeing and are taught to think in terms of finances.
We’ve made progress in the first two blocks, and it’s now time to take on the third!