ABSTRACT
Over the past decade, the extent of the ignorance of financial basics has become apparent. Untrained people have difficulties understanding even basic financial concepts such as the functioning of an interest rate or the principle of risk diversification. And people pay the price: low levels of financial literacy are associated with poorer economic outcomes. The natural response may be to impart financial literacy to the public, but this avenue shows little promise. Extensive reviews of the research find that financial education has little to no effect on knowledge or lasting behavioral change. What matters most for financial behavior are stable personality characteristics such as locus of control, numeracy, conscientiousness, and the tendency to procrastinate. Responsible regulators must take stock of the limits that human nature imposes upon rationality, whether from the emotional or the cognitive side. In practice, this means a careful mix of regulating the markets and encouraging, or requiring, the use of impartial advisers. Further, there is the important matter of educating citizens to enable their informed participation in debates on essential economic and social choices. That educational challenge is huge, and will require a sustained effort.
