Novica Nakov on Sat, 26 Feb 2011 23:14:14 +0100 (CET)

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Re: <nettime> How a Library Saved My Life. - what can be done in regard to an unsustainable system of student loans

> Now, I wrote, "People should be taught to live in within their economical
> means." Yes, they should be taught.

This line reminded me of the last article from Tim Harford:

   Illiteracy rules (

   I hope you won't mind me setting a little test of financial literacy.
   You buy a new £1,000 computer and borrow money to pay for it. You have
   a choice: either (a) pay 12 monthly instalments of £100; or (b) borrow
   money at an APR of 20 per cent, meaning you pay back £1,200 at the end
   of the year. Which offer is better - or are they (c) identical? (The
   answer is at the end of this column.)

   If you don't get it right, don't worry: 93 per cent of Americans don't
   either, according to Annamaria Lusardi, an economics professor and
   director of the Financial Literacy Center. (Financial illiteracy is
   also widespread internationally, she adds.) Far more obvious financial
   questions baffle the majority of people. And if you think the question
   is academic - and would like a hint at the answer - just ask yourself
   why companies are so keen to let you pay in instalments.

   The sophistication of financial products has increased dramatically;
   the sophistication of consumers has not. "Knowledge hasn't caught up
   with the real world," says Lusardi. "The important word is `literacy'.
   You can't live in society without being able to read and write, and
   now you can't live without being able to read and write financially."

   The obvious answer is financial education. But it has been tried and
   doesn't seem to work terribly well. According to a survey published by
   Lewis Mandell of the University of Washington, financial education
   seems to have no impact on formal measures of financial literacy,
   although, puzzlingly, it does seem to improve financial decisions a
   little later in life.

   For this reason, financial education sceptics such as law professor
   Lauren Wills argue that the whole project to boost financial literacy
   is misconceived and actively harmful. (My analogy: why not improve
   medical outcomes by teaching people to practise surgery on family
   members?) Wills would prefer regulators to simplify the financial
   landscape - presumably with a combination of bans and regulatory
   "nudges" - and simply abandon the financial education project

   Professor Lusardi disagrees. While the track record of financial
   education is not encouraging, she says "the evidence that is available
   now tells us very little" about whether it would work if done right.
   Classes are often offered by poorly trained teachers, she says, or
   courses for employees might be a single lunchtime chat about pensions.

   "A one-hour seminar is not going to work, for sure," she says. In
   short, perhaps the reason that financial education doesn't seem to
   work is that nobody has tried it properly.

   The Financial Literacy Center is trying more creative approaches. One
   promising technique is to use video testimony from workplace peers;
   another tactic, in partnership with a not-for-profit organisation,
   D2D, is to develop computer games that incorporate some financial
   concepts. Lusardi says initial results are promising and full
   randomised trials are in progress.

   I sympathise with both sides of this debate. I simply don't believe
   that financial education is impossible, or more trouble than it is
   worth. But without some intelligent regulation to preserve
   transparency and protect consumers - at the very least, from the most
   egregious abuses - I fear that the ability of educators to clarify how
   finance works will be outpaced by the ability of credit-card marketers
   and subprime mortgage peddlers to muddy the waters again. The
   financial educators should do better, but the financial regulators may
   have to meet them halfway.


   The answer is (b). The instalment payments hide a deceptively high
   interest rate. Because capital is being repaid almost immediately but
   total interest is still £200, the true interest rate is much higher
   than 20 per cent. Reader Ian Nicol informs me that Excel uses the
   formula (RATE(1*12,-100,1000)*12) to calculate interest rate, in this
   case more than 35 per cent.


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