What’s the problem with financial capability?

It sounds easy to teach – just teach financial skills.  So why doesn’t that work?  A few reasons.


  • We think of financial capability. 


But finance is only one tool in life, there are many others. There’s making good decisions, such as decisions about careers, health, housing as well as money.


Learning about finance doesn’t help to make better decisions generally.


Learning about how we make decisions, about how our minds work, how to separate needs from wants, to realise what our real passions are and work out how to pursue them helps with any sort of decision.


  • Life success isn’t about finance.


Would you rather be happy, productive and fulfilled, or rich?  The evidence is that materialistic values, having lots of “stuff” is actually linked to unhappiness, while doing things that have a value for you , doing things for which you have a talent, using money for the benefit of others (https://www.psychologytoday.com/blog/the-path-passionate-happiness/201509/3-ways-money-can-buy-happiness) are all linked to a fulfilling and happy life (and greater business success).


And a focus on finance as the sole object limits us.  Instead of choosing to study or work in something we love, would excel at and would eventually earn above average in, we do something that pays well on average, but that bores us and end up at the lower end – and miserable but trapped in a job we can’t afford to leave.


  • Finance is actually pretty simple to learn.


People say finance is difficult and because people say it, others believe it – we conform to norms (read “The Emperor’s New Clothes” by Hans Anderson).  Marketers use “9 out of 10 said….” because we listen to other people’s opinions to form our own – read “Social Proof” in Cialdini’s “Influence”.


Finance is relatively simple.  All pound coins are the same, they have no emotions, make no wild decisions, one pound plus another pound is always two pounds. Finance depends on money always being basically the same, or it can’t be exchanged properly and loses its function.


  • It’s people who are complicated.


Each person is unique, they have emotions, make irrational decisions.  Take one person and add another and you could have the cure for cancer or a weapon of mass destruction.


The human brain is the most complex single entity in the known universe.  It has emergent properties (complexity), it’s not linear so the results can be massively more or less than the sum of the parts and thesame  starting conditions don’t always lead to the same conclusion (chaotic), it’s self-organising and constantly rewiring itself and most of it isn’t available to consciousness.  It also comes with no user manual!


  • Learning anything depends more on motivation than complexity.


Most people can remember things they want to. People who are “bad at maths” can quote batting averages, count backwards in trebles ending on a double in darts and quote the goal scorers for the last 50 years for their team. People can remember, or instantly forget, Strictly contestants, Bayes’ Theorem, shopping lists or quantum physics formulae. Whether they remember or forget depends on relevance to their interests, not complexity.



Most things are simple if we actually want to learn them. The problem is that most people don’t want to learn finance. Hands up if you actually want to learn all the rules on pensions!



  • Life is not logical, so “rational thought” doesn’t always work.


In a casino, rationality (if you’re sensible) rules. You know the odds, the payoff, when the gamble ends and you know that the game doesn’t change in the middle.  Learning probability and statistics (like Bayes’ Theorem) is necessary. So from “A Beautiful Mind” to the Nudge Unit, we’re told to be “logical” and that the use of thinking that is “irrational”, “intuitive” of “heuristic” (mental short-cut) is a Mortal Sin.


In real life (and financial markets) you don’t know the odds, the payoff or when the gamble finishes (if indeed it does finish). The game regularly changes in the middle, due to technology, the budget, competitor action etc.


Tell me, which one is actually a gamble?


That’s a reason you have banking crises, market slumps, pension funds that disappear, sudden debts – people assume that the theory that works in a lab or casino applies to life and that is simply not true.  Read “Risk Savvy” by Gigerenzer.


  • Humans are well adapted to real life.


We evolved over 250,000 years or so to deal with life as it actually is – without casinos, John Nash, misinterpretations of Kahneman and Tversky and behavioural economists worshipping a painted idol called “rational thought”.


Everybody alive exists because our ancestors thought fast enough to survive.  Try applying Game Theory or Bayes’ Theorem to the question of whether it’s good odds to try to chase lions from a kill – see how many descendants you have when it takes you 45 minutes to work out whether to fight or run.


  • Unfortunately, the life we’re adapted for is hunter gathering – which most of us don’t do


Modern life isn’t what we evolved for, so we have various adaptations that served us well in the past, but don’t always help now.  They’re what behavioural economists keep moaning about, the “irrational” human mind, not realising that that’s the way it is and you can’t just change it and become a Vulcan and “logical”.


For example:

We have optimism bias, (http://eprints.lse.ac.uk/29133/, read “The Optimism Bias” by Sharot) because we need hope to get us out of bed (or our cave) in the morning.  We think we’re more in control than we are which is why so many projects are late and over budget, homework is handed in late, we never do as much on our day off as we expected etc.  We genuinely expect to pay loans back, we just don’t quite manage it in reality.


We evolved to think short term as going hungry today might mean dead in a week, so money today is much more valuable to us than money in a week, a month or a year.  That’s a reason pension provision is inadequate, £100 now has more value to us than £10,000 a year in 40 years’ time, http://digest.bps.org.uk/2012/07/prepared-to-wait-new-research.html).  So we genuinely feel we need the money now, we only want to have the money in the future, so we have to borrow it now.


We learned to keep track of favours, obligations, debts etc. as mental accounts, so we treat money on credit cards as different to cash (http://web.mit.edu/simester/Public/Papers/Alwaysleavehome.pdf) although it’s all, ultimately, of the same value objectively.


Having mental accounts and similarly having confirmation bias and being loss averse make perfect sense if you are a hunter gatherer (read Fiske, Structures of Social Life, Barkow, Cosmides and Tooby, The Adapted Mind and Pinker, The Blank Slate).  But in modern life you’ll probably pay more on credit card than you will in cash (nearly everybody does), you’ll distort the evidence to fit what you believe to start with instead of actually testing whether you’re right (we all do) and you’ll miss out on opportunities that rational thought would indicate you should take (most of us).


Notice, none of the problems are about money, they’re about how we operate as people


  • And there are a scores more reasons that it’s difficult to teach “financial capability”.


As examples:

Our habits are strong and hard to change (read “The Power of Habit”, by Duhigg).

We’re often ambivalent about whether we really want to change (read about Motivational Interviewing for change).


We have trouble deferring gratification (look up, “the marshmallow experiment”) and use the wrong tactics to do it.


We often apply the wrong tactics, at the wrong time and keep hoping for a magic solution to change instead of actually working at the right things (read “Changing for Good”, by Prochaska, Norcross and DiClemente).


We don’t know our own minds (look up, “the rope bridge experiment”, an example of how we don’t actually recognise the emotions that drive our behaviour).


We learn unconsciously – our “money stories” are very powerful, what we’ve learned early on about money stays with us (read about “life scripts” in Transactional Analysis and chapter 2 of “Finance is Personal” by Stephenson and Hutchins).


  • So what could we do?


Teach general skills, like decision making, prioritising and judgment that have multiple uses.


Teach how the brain works and how it can be controlled so it helps us, rather than confuses us.


Focus on motivation, what we value, happiness, fulfilment.


Teach ways to build motivation, to separate wants from needs for the individual and how to change habits and behaviour.


Teach the control of impulses, allowing people to put off gratification (such as saving for things).


Treat money as simply one tool in a whole toolbox to help achieve a happy, fulfilled life.


In short:

  • We think of financial capability



De-emphasise finance and emphasise human capability.


Recognise that we’re the complex, important part and that money is simple, relatively trivial and our servant, not our master.





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