By Matthew Kassel
Need advice about money? You might be better off not asking an expert.
So suggests a new study that found, among other things, that people with low financial acumen tend to learn more and make better decisions about money if they solicit advice from peers who have similar levels of financial knowledge rather than people who are more financially sophisticated.
Using a sample of 263 undergraduate students at the University of Birmingham in England–more than 50% of whom couldn’t answer three standard financial literacy questions–researchers found that subjects with little understanding of compound interest were more knowledgeable after seeking guidance from a peer who was similarly uninformed as opposed to someone possessing more financial savvy.
Speaking the same language
While this finding might seem counter intuitive, it makes sense on an interpersonal level, as communication is more effective between people who can appreciate each other’s gaps in knowledge and reasons for misunderstanding, says Sandro Ambuehl, a co-author of the study and an assistant professor at the University of Toronto’s Rotman School of Management.
It could be that because people are less likely to be intimidated when interacting with peers, they are more open to asking questions and working through problems. That, in turn, leads to more informed decision-making as opposed to just mimicking the financial decisions of people with more expertise.
“For this communication to work effectively, you need to be able to speak the same language as your peer,” Prof. Ambuehl says. “If your peer speaks in totally academic terms, it won’t help.” His fellow authors are B. Douglas Bernheim of Stanford University, Fulya Ersoy of Loyola Marymount University and Donna Harris of the University of Oxford. The study was published in September by the National Bureau of Economic Research as a working paper.
The paper stands out as a novel contribution to the literature on financial decision-making, says Charles Noussair, a professor at the University of Arizona’s Eller College of Management and an editor of the journal Experimental Economics.
“This is new stuff,” he says. “It actually says something about what happens in the real world.”
David Huffman, a professor of economics at the University of Pittsburgh, agrees. But he adds that the researchers could have provided stronger evidence fortheir interpretation of the findings. Perhaps, he says, financially sophisticated individuals don’t have an incentive to engage in deep conversations about money and investing with those who are less informed because they already have those areas figured out.
Whatever the reason, Dr. Huffman says, the study’s finding matters because it could help inform policy around financial education.
A personal-finance plea
Camelia Kuhnen, a professor of finance at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill, says the paper has meaningful implications outside the laboratory.
“In my view, this calls for having the majority of people in our society learn the basics of finance,” she says, “just as they learn the basics of math or science.”
If more people are financially literate, they can learn from each other when new information about the economy comes out, since they are all starting from similar places in terms of financial knowledge, says Dr. Kuhnen, who specializes in neuroeconomics. This suggests, she says, that large gaps in financialknowledge may, in effect, be harmful to the economy.
This article was written by Matthew Kassel, and was originally published by The Wall Street Journal, and can be found by clicking here.