A POPULAR named culprit in the sub-prime melt down has been the ignorance of borrowers; people conned into taking loans with low teaser rates and high repayment penalties. How can we protect such people in the future? Perhaps things would have been different if they knew better.



Even before the sub-prime crisis, there had been a frenzy of financial literacy campaigns. But is financial education really the answer? Not so, according to a new paper by law professor Lauren Willis. She believes promoting financial literacy does more harm than good. She highlights several reasons why even an educated consumer might make a bad choice. Actually, educated consumers may fare worse because they suffer from over confidence or take a false sense of security in their limited knowledge. According to Ms Willis promoting financial literacy actually harms consumers because it also absolves predatory lenders and the like of responsibility. They can claim their prey knew better.



Consumers generally do not serve as their own doctors and lawyers, and for reasons of efficient division of labor alone, generally should not serve as their own financial experts.





Even the most effective financial education will not give the average person the ability to run their own successful hedge fund. Ms Willis seems to view being financial literate as a binary state. Either people have a thorough knowledge of markets and financial products or are completely ignorant. She uses the analogy of people being their own doctors. It would be silly to have lay people rely on themselves for medical advice. But we do benefit from a basic knowledge of how human bodies function. It allows us to maintain a healthy lifestyle and effectively communicate with our doctor.



Ms Willis may underestimate how much many people do know. Olivia Mitchell and Annamaria Lusardi found many people do not even have the most basic financial knowledge. Most people do not know the difference between debt and equity, yet are responsible for saving and investing for their retirement. We have a population of people responsible for their financial future and ill-equipped to do so.



Ms Willis does raise some good points. We can not expect everyone to acquire the knowledge necessary to make complex financial decisions. But, she underestimates the value of teaching people the basics. The average borrower might not understand all the terms of their mortgage, but they might know the right questions to ask rather than feeling over-whelmed and completely hopeless.



Relying on a third party may help, but its not realistic. Education can not replace qualified and unbiased advice, but most people do not have access to this. The best solution is giving people some knowledge and presenting them with choices they can understand. Empowering individuals to control their financial future can have many benefits, but they need to be prepared.

