Grace Groner was born in 1909 in rural Illinois. Orphaned at age 12 and never married, she began her career during the Great Depression. She became a secretary, lived in a small cottage, bought used clothes, and never owned a car.
When Groner died in 2010, those close to her were shocked to learn she was worth at least $7 million. Even more amazing, she made it all on her own. The country secretary bought $180 worth of stocks in the 1930s, never sold, and let it compound into a fortune. She left it all to charity.
Now meet Richard Fuscone. He attended Dartmouth and earned an MBA from the University of Chicago. Rising through the ranks of high finance, Fuscone became Executive Chairman of the Americas at Merrill Lynch. Crain's once included Fuscone in a "40 under 40" list of successful businesspeople. He retired in 2000 to "pursue personal, charitable interests." Former Merrill CEO David Komansky praised Fuscone's "business savvy, leadership skills, sound judgment and personal integrity."
But Fuscone filed for bankruptcy in 2010 -- the same year Groner's fortune was revealed -- fighting to prevent foreclosure of his 18,471-square-foot, 11-bathroom, two-pool, two-elevator, seven-car-garage New York mansion. This was after selling another home in Palm Beach following a separate foreclosure. "My background is in the financial-services industry and I have been personally devastated by the financial crisis," Fuscone's bankruptcy filing allegedly stated. "I currently have no income."
These stories fascinate me. There is no plausible scenario in which a 100-year-old country secretary could beat Tiger Woods at golf, or be better at brain surgery than a brain surgeon. But -- fairly often -- that same country secretary can out-finance a Wall Street titan. Money is strange like that.
Less bang for your buck
One of the most common calls after the 2008 financial crisis was for America to double down on financial literacy. "We must strive to ensure all Americans have the skills to manage their fiscal resources effectively and avoid deceptive or predatory practices," President Obama wrote in 2011, calling for a new "financial literacy month."
But there's a funny thing about financial literacy: There are quite a few Grace Groners and Richard Fuscones out there. They are extreme examples, but the link between financial education and financial outcomes is surprisingly elusive.
A paper released last week by a trio of economists looked at 168 separate studies analyzing the effectiveness of financial literacy programs. To sum up their findings: It doesn't work. The authors found "interventions to improve financial literacy explain only 0.1% of the variance in financial behaviors studied, with weaker effects in low-income samples." And what little benefit education offered vanished quickly. "Even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention," they wrote.
This is nothing new. Lauren Willis at Loyola Law School has shown that financial literacy programs can actually be harmful to people's financial wellbeing. High school students who took part in a financial literacy course went on have more problems with their finances than students who skipped the course. Low-income consumers who took a class on money management "were less likely to plan and set future financial goals at follow-up than they were at baselines" one year later. As Jason Zweig of The Wall Street Journal wrote, soldiers who took a financial literacy class "ended up significantly less likely to have systematic control over their household budgets."
As Zweig bluntly put it, "there's remarkably little evidence that financial-literacy education ... works."
Part of the problem here is that defining "financial literacy" and "outcomes" is more art than science. There's a tremendous amount of financial advice out there. A lot of it is bogus. And some people would rather, say, go on a nice vacation than save for retirement. That's not necessarily a bad decision. To each their own.
But several studies offer a more convincing answer: Financial education programs don't improve outcomes because they tend to teach fundamental financial concepts, which aren't that important, rather than behavioral issues, which are.
Knowledge doesn't equal skill
As Willis wrote, "financial education appears to increase confidence without improving ability, leading to worse decisions."
Learning the definition of compound interest isn't going to do you much good unless you understand the devastation you'll bring to your wealth by panicking when the market drops. Knowing what a Roth IRA is won't do you much good if overconfidence entices you to take out lots of debt.
These basic behavioral differences are what separate the Grace Groners from the Richard Fuscones. Groner clearly understood patience. She understood frugality. She understood the value of a long-term view and how to not panic -- if only subconsciously. Fuscone, it seems, didn't. (To be fair, it's unclear exactly where his financial troubles came from.)
The traits most important to mastering your finances aren't typically taught in finance courses. You're more likely to see them in a psychology class. They include things like patience, an even temper, being skeptical of salesmen, and avoiding over-optimism. A lot of people miss this because it's not intuitive. But I think it explains, better than anything else, why so many people are bad with their money. And it extends beyond novices. The majority of highly educated, well-trained investment professionals perform abysmally. This has little to do with their understanding of finance and lots to do with the inability to control their emotions and behaviors.
Financial literacy is important. We should continue to push it. But it has to be coupled with a better understanding of the behavioral flaws that actually cause people to make bad decisions with their money. Until this is accepted, we will have more Richard Fuscones and fewer Grace Groners.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economcs.
