What I mean is that there's a big difference between knowing something and acting on it. We all know that if you consume more calories than you burn up, you'll get fatter. But this doesn't prevent obesity. In the same way, mere brain-knowledge about financial literacy might not prevent people making bad financial decisions. There are (at least) four reasons for this:
- Desperation. Even if you know that an APR of 4000% is a lousy deal, you might also know that your kids need new shoes. Guess which fact wins.
- The media. If the business and finance sections of the papers were literate and honest, they'd say: "we don't know much about the future, so stick some of your money into equity tracker funds and get on with your life." They don't say this because they must sell adverts and wrap some text around those adverts - and high-cost actively-managed funds are more likely to advertise than trackers. More generally, TV adverts - and even the programmes themselves - encourage us to spend more and get into debt.
- Cognitive biases. Even financially literate investors over-invest in expensive but poor-performing actively managed funds because of overconfidence or because an anchoring effect causes them to underestimate how horribly fees compound over time.
For these reasons, financial literacy itself is not enough. What matters is not just financial planning but character planning. Just as we keep our weight down by getting into habits of exercise and healthy eating, so we stay financially healthy by having the habit of spending less than we earn.
The simple maths of profits tells us this. Companies - in aggregate - can cope with high wages if those wages are returned to them in the form of consumer spending. If, however, wages are saved they become a net cost and, ceteris paribus, a threat to profits. It's no accident that the crisis of profitability in the 1970s coincided with a high personal savings ratio.
So, not only is financial literacy difficult to operationalize, it is also bad for capitalism not just because it deprives some firms of mug punters, but because it is a systemic danger to profits.