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May 8, 2009
Reflection on Economic and Financial Literacy: From Bananas to Stress Tests
By Cindy Ivanac-Lillig
During the month of April, I spent lots of time on the road for Money Smart Week, a successful and growing financial literacy campaign coordinated by the Chicago Fed. As I traveled and spoke words of welcome – or closed sessions thanking partners and residents for coming – it dawned on me that although I have spent years as a financial analyst, financial consultant, and economics instructor, my personal finance choices/plans are mediocre.
I had the pleasure or displeasure, depending on your point of view, of listening to many dry anecdotes in the last few weeks about the value of piggy banks and the importance of budgeting. And as I walked up to the lectern at my last Money Smart Week event, I realized that perhaps being financially and economically literate is not knowing that buying a banana at Starbucks is not a good financial decision because it is cheaper elsewhere. Rather, being financially and economically literate is knowing that one has to weigh costs against benefits. In this case, weighing the cost (banana is cheaper elsewhere) against the benefit (having something healthy to eat in the airport) can lead to a choice that is informed and therefore financially and economically literate. By the way, I have bought many a banana at Starbucks.
Now, why am I bringing this up on a blog where we talk economics and Fed policy? I am not sure, maybe because of how my time has been spent these last few weeks. Or perhaps, there is something deeper in human behavior and therefore economic behavior that doesn’t fit the world of economic theory. Perhaps the reason I say that I am extremely financially and economically literate (putting aside the two decades of schooling) is that I know to weigh the costs and benefits and feel pretty capable in doing so. But then why are my financial plans mediocre? I think it is probably because humans in general and me, in particular, are not very good at properly evaluating medium and long-term costs/benefits. Do I weigh how much I could save versus how healthy I would be by not purchasing the banana by year 2020 ? Not really -- because this scenario becomes very complex. Instead, I focus on the relatively short-term, as that is easier to understand.
Maybe our natural aversion to complex things and focus on the short-term contributed to our current financial situation. As world trade became more globalized and financial product innovation took off, many institutional/personal investors felt ill equipped to judge medium / long-term costs of complex products and focused on computer models and short-term costs. Evaluating long-term costs requires human analysis, transparent systems, and the knowledge that human behavior may be prone to try to avoid doing this!
This week’s bank stress tests may be a good entrée into this type of longer-term analysis for our banking sector. What do you think? Have I gone too far in tying a my Starbuck banana purchase to the stress tests ? (smile)
Posted by Cindy at May 8, 2009 12:13 AM
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Comments
Sometimes it's really that simple, isn't it? I feel a little stupid for not thinking of this myself/earlier, though.
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