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This article first appeared in Personal Wealth, The Edge Malaysia Weekly on August 7, 2017 - August 13, 2017

I have a confession. 

Regular hand washing was not something I was accustomed to until my son came along. Even then, I do not obsess about how often he washes his hands before meals, or how often I wash my hands. Most of the time, I forget to do so. Hand washing seems so basic and no one disputes the benefits of doing so, but it just slips my mind. Apparently, I am not alone in this and my shortcoming seems minor compared with what you are about to read. 

There have been numerous medical studies showing that hospital employees do not wash or disinfect their hands often enough — and doctors are the worst offenders. In an Australian study, doctors reported that their hand-washing rate was 73%. However, when these doctors were observed by the nurses, it turned out that their actual rate was a mere 9%. Imagine that — these doctors who treat numerous patients a day and carry all kinds of bacteria, viruses and other germs do not disinfect their hands on a regular basis.

We are talking about a bunch of truly educated people. Seven years of medical school would have taught them the importance of keeping their hands clean and yet, bizarrely, they are the worst at washing their hands regularly. 

We tend to assume that people make rational decisions when they have all the necessary information, but this does not seem to be true. Knowing the right thing does not necessarily translate into doing the right thing. It is the same thing with managing money. 

According to a paper published in the Management Science journal, in compiling the results of 168 studies on financial literacy programmes, three business school professors — Daniel Fernandes, John G Lynch and Richard Netemeyer — found that recipients of financial education do not perform noticeably better when it comes to saving more or avoiding debt. The paper suggests that financial education has a negligible impact on helping people make better financial decisions. It also points out that within 20 months, almost everyone who took a financial literacy class has forgotten what they have learnt. 

A study conducted by the London School of Economics found that better financial education has done very little to improve financial decision-making. It also discovered that financial behaviour is better explained by cognitive biases than financial literacy. Clearly, financial decisions are less about information and more about human nature. 

Every time a crisis happens or there is a major incident involving an investment that has gone awry, the popular response is for more consumer education or disclosures. It is intuitive, isn’t it? When people are more knowledgeable about financial matters, they will make better financial decisions. But from the studies mentioned above, we learn that financial education alone does not work. So, are there alternative approaches? 

First, can we find a more innovative way to deliver the message, instead of more fine print in a 20-page brochure or 30-minute infomercial? A recent study in South Africa explored the alternative of embedding financial messages in soap operas. The study had people watch two different television shows about leading characters who gamble, buy items using instalment plans and wind up deeply in debt. One show featured messages on financial literacy while the other did not. The study found that the viewers of the show without the messages were more likely to make poor financial decisions. So, we need to consider reaching out and delivering our message in a different way. 

Second, learning decays quickly. How much do you remember about the Pythagorean theorem from maths class in school? Can we deliver assistance before a decision is made when people need it? For example, secondary school students should be taught how student loans work while university students should be educated on how credit cards, car loans and mortgages work before they graduate and enter the job market.     

Just as we seek the advice of doctors for our health problems, we should have access to affordable and quality independent financial advice. The key word here is “independent” — independent of products, brands or monetary incentives. Financial advisers need to be neutral and not have conflicts of interest by also being sales people. These professionals can provide advice on key financial decisions such as buying a home, starting a business or taking on more debt. 

Finally, if we really want to improve financial decision-making, shouldn’t we look at changing the offer and not the consumer? This is the rallying cry to the wealth management and financial industry. The UK’s financial regulators have already made the shift away from improving disclosure information and financial literacy programmes to influencing the way financial firms behave. Information disclosure is no longer the main tool regulators rely on to protect consumers. 

We should have simpler financial products and simpler offerings. Clearly, if we are already struggling to educate customers on financial jargon, it makes plenty of sense to simplify the products offered. Will this stifle innovation? I would argue, let’s put innovation where it is needed the most — making it easy for the consumer. 

In cases where too many products are being offered, consider default options in case of hesitation. For example, buyers of investment-linked plans are often left to decide between different funds. There should be a default option. It should not be left to the whims of an agent. 

Whether it is hand washing or money management, it is not about how much we know, it is really about human behaviour. Financial education programmes simply assume that if we can arm people with the right information, they can avoid bad financial decisions. It is not enough. Relying on financial education alone makes it way too easy for us as an industry to wash our hands (pun intended) of the problem. 

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