I just ran across this James Surowieki essay published last summer. It makes three straightforward points:
– Financial illiteracy is rampant.
– That’s bad news in a world in which ordinary folks are called on to make complicated financial choices: about retirement investments, about home mortgages, about consumer debt, and about health insurance.
– It turns out not to be very hard to improve financial literacy, for example in high-school classrooms.
Therefore, Surowieki argues, programs to improve financial literacy deserve support.
Quite an elegant argument, and, I think, clearly right, on its own terms.
But now let’s add one more fact: the happiness literature demonstrates that the trait of caring about and thinking about money is strongly negatively correlated with happiness. Do programs to improve financial literacy make people care more and think more about money? I have no idea; it could go ether way, or there might be no correlation. But if financial literacy comes at a cost in happiness, the emotional losses ought to be weighed against the financial gains.
Of course, there’s an alternative to requiring that everyone become a low-grade financial expert. We could instead have a social and economic system that puts less strain on individual financial decision-making. Instead, as Surowieki points out, we’ve been moving in the opposite direction, for example with the defined-contribution plan replacing the defined-benefit plan.
That’s one big advantage of Social Security over other means of providing retirement income: in addition to spreading risk, it eliminates the need for 150 million amateur Warren Buffets.
Footnote In considering this problem, the most important fact is that half the population has an IQ of under 100. The average reader of this blog is probably two standard deviations above the mean, and so are most of the people she knows. So this is not one of the public-policy problems for which introspection is a useful research technique.