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The quantity, complexity and importance of the financial decisions we have to make keeps increasing.<\/strong> For example, as traditional defined-benefit pension plans going extinct, people increasingly have to manage their own retirement plans. There are more investment choices than ever: structured CDs, marketplace lending, crowdfunded start-ups not to mention thousands of ETFs and mutual funds. There are more borrowing choices too: rewards cards, reverse mortgages, peer-to-peer lending, rent-to-own and more.<\/p>\n

Perhaps not coincidentally<\/a>, we know people are making poor decisions.<\/strong> Bankruptcies have been increasing steadily for forty years. There were 269,751<\/a>\u00a0foreclosures in process as of the third quarter of 2015. \u00a0Forty percent of households with people aged 55 to 64 have saved exactly zero dollars for retirement. A similar proportion<\/a> maintain a balance on their credit cards despite exorbitant interest rates.<\/p>\n

I always thought that education should be part of the answer. How can you choose between a mutual fund and an ETF if you don’t know the difference? Pity that research suggests that education is not the answer<\/strong>, at least not how such education is traditionally delivered.<\/p>\n

Counseling, high school classes, seminars, workshops, etc. are almost worthless according to a meta-study<\/a> of 201 investigations<\/strong> of the effect on actual behaviors of financial literacy and education. The study found that the effectiveness drops off quickly over time and had even less effect on lower-income people who arguably are at greater risk.<\/p>\n

Education may be ineffective because good education is swamped by bad. Consider this advice from Discover’s website<\/a>: “Credit cards can also help consumers stretch their monthly income.”\u00a0According to the CFPB, financial institution marketing budgets are 25 times larger<\/a> than financial education spending in the US.<\/strong> Also, education can help little when decisions are based on emotion or biased by overconfidence rather than fact and analysis.<\/p>\n

Why does the education myth persist?<\/strong> Perhaps it does because it is in the interests of many financial institutions<\/a> who argue that an educated consumer has no need for stronger consumer protections and a more regulated financial services industry. It helps make it possible for them to offer a wide range of complex, opaque and profitable financial products, when simpler and cheaper alternative would be adequate for most people. In my experience on Wall Street, complex products can be many times more rewarding than plain-vanilla options.<\/p>\n

Fortunately, there are some good ideas about what we can do to improve financial decision-making:<\/p>\n