A recent New York Times article by Harvard Economist Sendhil Mullainathan suggested that investing is too complicated. He candidly shared his own struggles to figure out what to invest in, and concluded that investing is like “a recurrent nightmare, one in which I am taking a final exam in a class I never attended and a subject I don’t understand.”
Judging from the hundreds of comments posted in response to the article, many people agree with him: investing is too difficult.
Even something as complicated as investing can be taught
Yes, investing is complicated. But so is driving a car, especially if you’ve never received instruction. Even after being taught how to drive, it takes practice—lots of time behind the wheel, first accompanied by an experienced driver, and then on your own. Despite the inherent complexity of the task of driving, we have a process in place that takes people from novice to reasonably competent in relatively short order. The timing of the training and licensing, when first-time drivers are still living at home, provides for an extended season of mentoring as well.
Why don’t we apply that same approach to financial education? Wouldn’t we turn out more adults who are knowledgeable and competent investors if they were taught at a young age how to invest (even better if they were taught how to deal with all aspects of personal finance), if they received hands-on experience at an early age, and if they were mentored by experienced investors (not necessarily their parents) as they got their footing?
Unfortunately, managing money remains the most important topic that’s either not taught, or not taught very much, in school.
Steps in the right direction
At least one organization is working on that issue. The non-profit JumpStart Coalition, along with some 150 partner organizations, has created a comprehensive set of National Standards in K-12 Personal Finance Education. It’s an impressive body of work and an important accomplishment.
However, standards are not the same thing as requirements. It’s usually up to each individual state legislature to determine what will be required of its students, although in some cases these decisions are made at the county, local, or school district level.
The gap between the existence of personal finance standards and the actual teaching of personal finance is significant. According to the Council for Economic Education, just 17 states require students to take a course on personal finance as a requirement for high school graduation. Of those, just 6 require the testing of student knowledge in personal finance.
JumpStart President and CEO Laura Levine told me by e-mail that financial education in schools is growing, but that “we have to be realistic about how soon we’ll see results. (If a 17 year old takes a financial course in high school, he might have knowledge gain, but might not be a savvy investor within a couple of years because he’s still a teenager and there are other factors involved.).”
The Coalition hosts an annual educator conference that last year drew teachers from 48 states. It also provides an online clearinghouse of materials that can be used in the classroom and other resources to foster financial education in schools.
Of course, parents have a greater responsibility for teaching their kids about money than schools do, but that’s a topic for another day.
For now, how much personal finance and investing instruction did you receive when you were in school? How much do—or did—your kids receive?