Prof. Shiller and Financial Advice

Robert Shiller (he of Irrational Exuberance fame) has a column in today’s New York Times linking the current financial crisis with fundamental mistakes made by the financially illiterate masses. Well, golly.

I am a fan of Prof. Shiller’s. His books are worth reading (if a bit dense for the non-economist) and he is an engaging public speaker. He is one of the very few who can look at the global recession and rightly say “I told you so.”

But the good professor is still a college professor. Academics can be very smart and insightful but they tend to have difficulty with the realities of the world that the rest of us live in. Shiller’s basic suggestion is that some of the government bailout money be used to start “a major program to subsidize personal finance advice for everyone.” This, I suppose, because the Federal Government has such a stellar track record on education.

He cites a “paper” presented at a recent academic conference that he says shows that people who fail “financial literacy tests” tend “to make serious investment mistakes.”

First off, the paper looks like a PowerPoint presentation to me. Second, it doesn’t say much about bad decisions, in fact it concludes that the financial illiterates were no more likely to take out an ARM than a fixed rate mortgage. (Although they were a lot less likely to understand the difference.) And thirdly, the test of financial literacy is really just a few fourth grade math problems that happen to be about money. It’s not a literacy test, it’s an intellegence test.

So it turns out that dumb people sometimes do dumb things. Fascinating. I think the most important realization from this is that there are banks that will give a mortgage to somebody who doesn’t know the price of a $300 sofa marked down 50%.

What Shiller is missing is that there is no need to subsidize the production of personal financial advice. We’ve got lots of that already. Foolish choices were not made because of a lack of access to advice. They were/are made because of a lack of access to good advice.

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