lifestyle leader

That's the question being asked in this report by Maurice Black and Erin O'Connor over at Minding the Campus. Actually, the title is misleading since they are really asking two questions, one focused on knowledge of personal finances (debt, credit, investment, risk) and the other on knowledge of basic economic principles. They are related, but distinct, so I think it's worth looking at them separately.

I think answering the first part is easy: yes, we should spend more time teaching youth the basics of personal finance. As the report points out, a large - and growing - chunk of [American] children make use of debit and credit cards, but few have a strong grasp of concepts like credit risk, interest rates and so on. One paragraph reads:

...more than half of all high-school seniors do not realize that paying off a credit card balance more slowly will result in higher finance charges. Only one in three teens knows how to read a bank statement, balance a checkbook, or pay a bill. In short, young adults have ready access to finance, but not to education about finance.

That's discouraging, particularly in light of how we've seen the consequences of consumers in Anglo-American economies taking on completely unsustainable levels of personal debt. Now, society as a whole might be better off if we were better educated in plenty of areas - a basic understanding of, say, automechanics and carpentry. But those are fields that can be safely contracted out to specialists; personal finance is an area that has the potential for more wide-ranging costs and benefits.

I would put it in the same category as health and sexual education: the more aware you are of the basic facts, the more informed your decisions will be and people around you will benefit. For instance, perhaps more education on the basics of infectious disease will lead to more people getting vaccinated - that's a public good. Similarly, it's become clear that poor finance has contagious effects as well.

This is one reason why I think high school math courses should place greater emphasis on teaching risk and probability. In my personal experience, once you moved past basic math courses you were offered Algebra & Geometry, Calculus and other high-level material. But very few of our daily decisions require an understanding of calculus. By contrast, a great deal of them require some basic assessments on risk, probabilities and returns: everything from card games to deciding whether to go back to school, from buying a stock to starting your own business, right down to family planning.

Moreover, psychologists have plenty of experimental evidence suggesting that, as a species, we are very poor at guaging probabilities and risks: we tend to discount high-probability events like heart disease, but focus on low-probability, attention-grabbing events like airplane crashes. So we need all the help we can get. For the topic at hand, a basic understanding of risk and probability might help some people realize that they need more diversity in their financial portfolio than that which is provided by a 401(k), or something similar.

So for me, a stronger emphasis on the basics of personal finances in school would be an excellent idea. However, I'm not sure the case is so clear for the study of economics more generally - but I'll look at that next. In the meantime, does anyone have suggestions for other areas we could beef up on when it comes to secondary and higher education? Comment away.