Financial literacy promotion may sound perfectly sensible—who wouldn’t want to teach children and adults the secrets of managing money?—but in the face of recent research it looks increasingly like a faith-based initiative.

(Photo: Andrew Rich)

Dave Cannon has made several attempts over the past decade to learn the basics of money management. The Seattle entrepreneur took a class in personal finance when he was an undergraduate in college, and another when he attended Brigham Young University’s business school. But the lessons, by and large, didn’t take. By the time he hit 30, Cannon had racked up a $12,000 credit card tab and, in tandem with his wife, another $60,000 in student loan debt.

“It’s hard to turn an hour’s worth of education into a system you’ll use every day,” Cannon says.

But that doesn’t stop us from trying.

There is a certain line of thinking—embraced by Wall Street and politicians of both parties—that holds that one of the major causes of the Great Recession was the public’s lack of financial literacy. The root problem wasn’t just an unchecked mortgage industry or an investment sector that wagered billions on Byzantine mortgage-backed securities; the ignorance and greed of Main Street Americans, which made them easy marks, played a major role too. To fend off further economic calamity and keep families afloat, many financial literacy advocates believe our best hope is to teach people to live within their means, to carefully check mortgage documents before signing them, and to save enough money to survive a prolonged period of unemployment. All we need are the right educational tools.

Answering the call, financial literacy initiatives, both public and private, have proliferated wildly over the past several years. There’s Sesame Street’s "For Me, For You, For Later," in which Elmo and his preschool-age fans learn the basics of spending, saving, and living within one’s means as the furry Muppet decides to forgo a $1 “stinky ball” in order to save up enough money to purchase a glittery “fantastic ball” instead. At the other end of the age spectrum, there’s Money Smart for Older Adults, a joint project of the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau designed to teach the elderly how to avoid falling for financial scams.

The leading cause of bankruptcy is not overspending, nor lack of adequate financial planning, but the financial free fall caused by a health crisis.

In between, there are numerous online games, like Financial Football, a co-production of Visa and the NFL that quizzes players about things like compound interest and identity theft as they make their way toward a virtual end zone. There are programs for children and teens peddled by personal finance gurus like Dave Ramsey. And there are untold numbers of special school curricula, many created by financial services outfits like Capital One or your local credit union, which offer education with a side of brand awareness. (Banks relish the opportunity to get their names in front of future customers and their parents in a warm and virtuous context.)

Government, too, stands squarely behind these efforts. More than a dozen states now require that their students take a class in personal finance before they can receive a high school degree. And the Obama administration—acting under the terms of the Dodd-Frank financial reform law—has set up a federal Office of Financial Education housed in the Consumer Financial Protection Bureau. “Financial education supports not only individual well-being, but also the economic health of our nation,” said Federal Reserve Chairman Ben Bernanke in a speech last year. In case that doesn’t make clear what’s supposedly riding on this effort, in 2012 the U.S. Senate held a hearing titled “Financial Literacy: Empowering Americans to Prevent the Next Financial Crisis.”

There’s only one problem: mounting, resounding evidence shows that financial literacy education doesn’t work. Dave Cannon’s experience is not the exception but the norm. “We have this idea that if we teach kids good habits they will use them. But it’s just not true,” explains John Lynch, a consumer psychologist at the University of Colorado’s Leeds School of Business. Not all behaviors are governed by rational intentions. “A kid in the backseat of a car,” Lynch says, “is not thinking about Sex Ed.”

FINANCIAL LITERACY PROMOTION MAY sound perfectly sensible—who wouldn’t want to teach children and adults the secrets of managing money?—but in the face of recent research it looks increasingly like a faith-based initiative. Consider one recent paper, scheduled for publication in a forthcoming issue of the journal Management Science. In a meta-analysis, Lynch and the marketing experts Daniel Fernandes and Richard Netemeyer compiled the results of more than 200 studies of financial literacy programs, adjusting for subjects’ family background and personality traits that had been ignored in the previous research. The result? Financial education has a “negligible” impact on subsequent financial decisions and behavior. Within 20 months, almost everyone who has taken a financial literacy class has forgotten what they learned.

These findings echo the results of another recent working paper, by the economists Shawn Cole at the Harvard Business School, Anna Paulson at the Federal Reserve Bank of Chicago, and Gauri Kartini Shastry at Wellesley College, on the efficacy of state laws requiring financial literacy to be taught in schools. Their conclusion: “State mandates requiring high school students to take personal finance courses have no effect on savings or investment behavior.”

Another study, from 2009, tested the financial literacy of recent high school graduates who had taken a highly regarded personal finance class. They did no better than graduates who had not taken the class. One of the study’s authors, the economist Lewis Mandell, was a founder of the modern financial literacy movement, but the evidence has prompted him to turn his back on the mainstream financial literacy paradigm. “Financial education doesn’t work when it’s given in advance of when the consumer needs it,” he says flatly.

Reluctant to give up entirely on educating consumers, a number of scholars—including Lynch and Mandell—are now pushing for a model of financial literacy promotion known as just-in-time education. Instead of teaching personal finance in schools, the idea goes, a combination of education and coaching should be offered at the point of sale, or when people have reached a point in their lives when they actually need a given financial service. Don’t offer retirement education in high school or even college. Wait until someone starts a new job and needs to understand and manage a 401(k).

It sounds like common sense. But even just-in-time education has its problems. If counseling is delivered at the point of sale, for instance, the potential for conflicts of interest is huge. Where does education end and marketing begin? With no credentialing or oversight requirements in the financial literacy world, it’s up to the consumer—the one in need of enlightenment, remember—to determine whether a lesson objectively and thoroughly covers the most important bases. Take, for example, Ally Financial, a company that offers car loans and other products. It has put together an entire online education site called Ally Wallet Wise. But the site makes no mention of subprime auto loans, does not say how to determine whether you are being offered one, and doesn’t help users find out what an optimal interest rate might be.

In addition, the very notion that there is some moment that’s “just in time” for many financial decisions may be a mirage. Consider retirement savings for a moment. In our current, do-it-yourself model of financial planning, built on instruments like the 401(k), consumers must begin saving early in life to maximize the money they will have on hand at the end of their careers. But that often doesn’t happen. People stay in school until their late 20s, or, faced with competing demands on their funds, come to believe they can’t afford to put money away for some ill-defined future need. They make bad decisions for what seem like good reasons. If a counselor comes along at some point in this process, it’s likely not going to be “just in time,” but either too early to make an impression—or too late to make a significant difference.

Finally, it’s worth noting that standards of good advice have a way of shifting over time in a way that, say, basic facts of history or math do not. It used to be that people saving for retirement were told to set aside 10 percent of their salary. Now, many experts suggest 15 or even 20 percent.

You can see the promise and peril of financial literacy education play out in Dave Cannon’s life. The information presented in his money classes was “a blur,” he now says. “When we were in college, we were just surviving. There was not much use for financial principles.” So he forgot those principles more or less immediately.

What he does recall is that some of the classes were obviously lightly disguised marketing ploys. With a laugh, he recalls how one of his instructors, a seller of financial services, treated class as an opportunity for gathering leads. “A lot of financial advisers give good trainings,” Cannon says, “and then they follow up and try to sell you more expensive stuff.”

Cannon finally did start to take some financial principles to heart when he and his wife recently decided they wanted to buy a home. They went to a mortgage broker who sat down with them, explained that their debt to income ratio was too high, and helped them work out a budget—one that allowed them to simultaneously pay down their credit card debt while saving more aggressively for a down payment. They’ve since cut their credit card debt in half and have begun looking for homes. So just-in-time counseling works? Cannon says yes. “I wasn’t really ready to learn how to make a budget or build savings 'til we had goals,” Cannon told me. “The first behavior I needed to learn to change was to stop spending so much damn money.”

A FEW MONTHS AGO, a website called Low Pay Is Not OK brought a burst of national attention to a financial literacy initiative created by Visa and McDonald’s, designed to teach low-wage McDonald’s employees “practical money skills for life.” The online program included a suggested monthly budget for a typical employee that left room for $800 of “spending money” after expenses. The budget assumed that this employee would take a second job to bring in extra money, while not spending a penny on child care or heat, and spending a laughable $20 a month on health insurance. The intended moral of the budgeting exercise: “You can have almost anything you want, as long as you plan ahead and save for it.”

The sheer cluelessness of this exercise caused uproar on the Internet, and no wonder. The United States is an increasingly class-stratified country, where the engines of mobility appear to have stalled. Minimum wage jobs lead to other minimum wage jobs. Salaries are stagnant. College tuition has soared at rates well beyond that of inflation, forcing students to turn to loans to get by, which in turn leaves them servicing massive amounts of debt in their 20s, a time when financial literacy classes—citing the power of compound interest—say they should save. The leading cause of bankruptcy is not overspending, nor lack of adequate financial planning, but the financial free fall caused by a health crisis.

Dave Cannon may attribute his financial troubles to a lack of discipline and poor money management, but when I asked him how his credit card debt grew, he told me it was medical bills. “My family wasn’t in a position to help,” he offered by way of explanation. No amount of financial literacy can change a situation like that.

Personal shortcomings and mistakes in managing money can indeed worsen the financial situation for many of us, but even these may be more a function of stress and scarcity than ignorance. Recent research by the behavioral economists Sendhil Mullainathan and Eldar Shafir has shown that perfectly intelligent people become much less so when they are experiencing a shortage of money, time, or attention. They develop a kind of tunnel vision that erodes the long-term thinking essential to financial planning. (Indian sugarcane farmers, for instance, perform worse on cognitive tests before a harvest, when they are cash poor, than they do after they’ve sold a crop.)

Trying to take some of these realities into account, a small group of educators is fundamentally rethinking the concept of financial literacy. Chris Arthur is an eighth grade teacher and a Ph.D. candidate in education at York University in Toronto. When he taught the subject in the past, he exposed his students to the Great Piggy Bank Adventure, a traditional financial literacy game produced by T. Rowe Price and Disney, and introduced them to the business concepts promoted by Junior Achievement, the children’s entrepreneurship organization. But last year he also made them play an online game called Spent, which is not a financial literacy product at all.

Spent was designed a few years ago for the North Carolina charity Urban Ministries of Durham. The concept is simple. The gamer assumes the role of a low-wage worker—like, say, someone at McDonald’s—attempting to get by until the end of the month. Players are faced with a relentless series of decisions and tradeoffs, and almost anything—a gift for a child’s birthday, a plea from a family member to help pay for needed medication—can send them into a financial downward spiral.

Needless to say, it’s just about impossible to achieve anything resembling financial success in the game of Spent. And that’s the point. “It challenges the dominant framing of financial insecurity as wholly a problem of ignorance and irresponsible consumer behavior,” Arthur told me.

Spent, like the controversy that ended up swirling around McDonald’s suggested employee budget, points to an oft-buried truth. The financial literacy movement presumes that with a modicum of education, we can all be equal in the financial and economic marketplace. But that’s a false promise. Financial literacy is, first of all, no substitute for financial regulation. It’s also an ultimately ineffective personal solution to a systemic political and economic problem. And even McDonald’s knows it. As I was reporting this piece, the Low Pay is Not OK website released a recording of a McDonald’s employee calling the firm’s help line for financial advice, saying she could not make ends meet on her salary. The counselor she spoke with suggested she locate a local food pantry and apply for food stamps and Medicaid.

This post originally appeared in the January/February 2014 issueofPacific Standard as "Crash Course." For more, consider subscribing to our bimonthly print magazine.