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Most people have never seen a germ, but they still wash their hands. Economist Justin Wolfers says that’s proof experts can convince people to change their behavior based on something they can’t see or experience directly. When it comes to money, though, economists haven’t been nearly as successful.
“Most people aren’t washing their hands when it comes to our field of inquiry,” Wolfers said during a recent speech at Stanford University’s Initiative for Financial Decision-Making. He pointed to people missing out on employer retirement matches, carrying high-interest credit card debt while keeping cash in low-interest savings accounts and paying for actively managed funds despite their higher fees.
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Many People Don’t Understand The Financial Basics
The problem starts with financial literacy. Wolfers presented data from the 2024 Financial Industry Regulatory Authority Investor Education Foundation showed that 69% of Americans correctly understood that $100 earning 2% interest annually would grow to more than $102 after five years.
But only 58% understood that money earning 1% interest while inflation runs at 2% would buy less after a year. Asked whether owning a single company’s stock is usually safer than investing in a stock mutual fund, just 41% correctly answered “false.” Nearly half said they didn’t know.
Wolfers thinks those gaps can have serious consequences over a lifetime. He compared the potential cost of poor financial decisions with economic issues that receive enormous attention from economists, including inflation and business cycles.
“We have literally hundreds of economists meeting in rooms and screaming at each other about what the [Federal Reserve System] should do next,” he said at Stanford. “And the answer is it doesn’t much matter relative to the lessons we teach.”
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Wolfers argued that financial education deserves 10 times the resources of the Federal Reserve system, enough for 10,000 Ph.D. economists.
“By the way, no part of me is joking,” he said.
