A Fourth Era: Balancing Behavioral Interventions with Quality Education

Financial education alone isn't the answer to improving client outcomes, but we shouldn’t forsake education for behavior-only approaches.

The current focus on client outcomes – as demonstrated by the proliferation of frameworks describing financial health, well-being, or similar all-encompassing concepts – has renewed attention on how we achieve positive impact for clients. Currently, the behaviorists – those who believe an understanding of cognitive biases and deft application of behavioral insights in intervention design can lead to superior outcomes – rule the day. Meanwhile, financial education, traditionally seen as an enabler of better client outcomes, has become debatable, as research has shown that traditionally delivered education programs provide mixed results at best. Collectively, these trends are giving way to the narratives that client outcomes are achievable through behavioral interventions and that financial education is an ineffective relic of the past.

Current trends are giving way to narratives that client outcomes are achievable through behavioral interventions, and that financial education is an ineffective relic of the past.

This is a dangerous story. It positions the concept of education as an antagonist to behavioral insights rather than as a collaborator, and it presumes that behavioral interventions are superior to educational ones. This post aims to re-balance that narrative.

A quick point of order: financial education and financial literacy are often used interchangeably – in colloquial conversation this makes sense (“educated” and “literate” are synonyms, after all) but using them interchangeably confuses the delivery of education with its intended outcome (literate clients). I use the term financial education to refer to the process of teaching knowledge and skills and financial literacy as the state in which one possesses financial knowledge and skills.

A People’s History of Modern Financial Education

The First and Second Eras

The first era began in earnest at the start of this century, when nations began considering the consequences that a lack of financial literacy could have on their economies. This concern resulted in the creation of the Organization for Economic Cooperation and Development’s (OECD) “Recommendation on Principles and Good Practices for Financial Education and Awareness” in 2005 and associated efforts to develop national financial education strategies. In 2015, the OECD reported that 59 countries had developed such strategies. As part of and in parallel to these strategies, institutions developed in-house financial education content or adapted content from major initiatives like the Global Financial Education Program developed by Freedom from Hunger and Microfinance Opportunities.

This era was predicated on the idea that developing financially literate people would unlock progress – households would be better able to manage their money and micro-entrepreneurs would make more productive use of microcredit.

The second era began about a decade ago, with a recognition that while literacy may be necessary, it was likely insufficient to unleash low-income clients’ full potential. Being literate was one thing, but what people really needed to be was capable, and capability involved more than just knowledge and skills. The financial inclusion industry set-out to determine what capability involved, and organizations coalesced around the idea that capability included knowledge, skills, and attitudes. Many organizations included other elements in their idea of capability too. For instance, CFI’s and the World Bank’s financial capability definitions include behavior. I am not a fan of this. I think it conflates a short-term outcome (developing knowledge, skills, attitudes) with the next stage in that process (better behaviors). A post from this blog by Microfinance Opportunities – which owns the top hit on Google for “What is financial capability” – includes self-efficacy and access in its definition (self-efficacy is defined in this context as an individual’s belief in his or her ability to manage money well).

The second era’s high point might have been in 2012, when the Citi Foundation and Monitor released their “Bridging the Gap” report extolling the possibilities of a business case for financial capability. The possibilities raised by the report went unrealized during the next few years and funding for financial capability work largely dried up.

Arguably, the harbinger of financial education’s decline was the lack of rigorous evidence linking it to literacy, capability, or other client outcomes. During the second era, researchers began conducting a series of randomized control trials and other studies. While some studies did show positive impacts, the totality of the evidence suggests that financial education is not a consistently effective intervention.

The Third Era

During these research efforts, the third era – the era of the behaviorists – began. Behavioral economics – with its focus on uncovering cognitive biases, delineating how people make decisions, and developing behaviorally-informed techniques to promote behavior – has been widely accepted as a potential solution to the financial education problem. Rather than invest in costly, traditional education programs, believers in behavioral economics tout the potential of things like rules-of-thumb, default options, and reminders to influence outcomes more effectively than intensive curricula. The evidence supporting this perspective is strong and growing (see insight2impact’s impressive compendium of studies examining the efficacy of behavioral principles).

The Fourth Era

Behaviorally-informed interventions can be incredibly powerful tools, but they have shortcomings. A good portion of the evidence supporting their efficacy comes from lab experiments, they are limited in their application, and there are situations in which the intervention doesn’t work or the results fade (consider these examples from Washington University’s Center for Social Development, Yale’s Economic Growth Center, Inter-American Development/Multilateral Investment Fund, and Anett John). There is also no evidence that behavioral interventions improve people’s rational decision making in the long term. In other words, they don’t build knowledge, skills, attitudes, or behaviors that transfer to other areas of their lives.

There is a compelling case to be made that building capability could yield more far-reaching outcomes. Consider this World Bank research paper on savings behavior in Mozambique, which shows that financial education about formal savings leads people to save more in more institutions, suggesting that learnings were portable outside the study context. Across the world, in China, this University of Chicago study on teaching the concept of compound interest within the context of pension accounts shows some evidence that respondents applied the concept in other areas of their lives. While it is not a randomized control trial, this NBER multi-country study shows that better business practices – including marketing practices, inventory control, record keeping, and financial planning – are positively correlated with survival rates and sales growth of micro, small, and medium enterprises (MSMEs). In this paper, World Bank researchers showed a similar correlation.

How do we square that building capability may lead to more durable and expansive impacts with the evidence to-date about financial education? One potential issue, which I haven’t seen discussed much, is the quality of the education programs that are being evaluated.

Lessons from Teaching

Delivering quality education – regardless of whether it’s in the classroom or online, and whether it lasts for a day or a year – is a hard thing to do well. In my previous life, I was a high school math teacher, and as part of my job, I immersed myself in pedagogy, trying to learn how to do my job better. There were several principles that I would deploy in my classroom to reach students: differentiating curriculum so students were met at their ability level; scaffolding lessons (separating complex ideas into easier to learn chunks) to avoid cognitive overloading; spiraling content (coming back to things over and over again) to reinforce learning over time; and making sure no single part of an hour long lesson lasted more than 10 minutes to keep things engaging.

If you implement a mediocre education program, mediocre results shouldn’t be a surprise.

Few, if any, of the financial education programs I have seen employ these elements, so every time I read about a failed financial education experiment, I question how well the curriculum was designed and delivered. Unfortunately, most academic reports don’t provide enough detail on the delivery, and within financial inclusion, researchers aren’t spending much time testing pedagogical techniques. The point is that if you implement a mediocre education program, mediocre results shouldn’t be a surprise.


Thankfully, several organizations are recognizing that methods matter. At CFI, we suggested seven behaviorally-informed ideas that should be incorporated into financial literacy and capability efforts. The Consumer Financial Protection Bureau also has a set of five principles for effective financial education programs, which include tips that will sound familiar, including tailoring financial education to specific circumstances, linking education to the right moments, and providing actionable concrete tasks. Innovations for Poverty Action has similar principles, and they also recommend making it entertaining and targeting it to youth.

My hope for the fourth era is that we pull the best pieces from the lessons referenced in this blog: financial education will be delivered so that it is scaffolded, differentiated, and entertaining; learners will be presented with content regularly and ideally at critical moments; the best parts of behavioral economics will be incorporated to avoid our worst cognitive biases and reinforce good behaviors; and through these collective efforts we will achieve gains that are sustainable beyond one study, product, or provider.

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