Wednesday, July 23, 2008

Paternalism to Solve Financial Illiteracy

From Steven Dubner on the Freakonomics blog on a financial literacy survey:
...Lusardi writes that among respondents age 50 and older, only half of them got the first two answers right and only one-third of them got all three answers right.
With most U.S. companies doing away with big employee pensions (see Roger Lowenstein’s new book While America Aged), more and more people have to plan their own retirements...
A lot of behavioral economics, including the good ideas in Nudge, is about cleverly correcting harmful human tendencies — but many of these tendencies need correction only because so many people are so undereducated in such matters.
Dubner comes across to me as being against paternalism in this particular instance, but I can see these new financial literacy surveys being used as evidence for more government paternalism when it comes to our investing. Soon the argument for social security will be that we can't manage our own investments, thus need the government to do it for us.

Yet from the first two statements quoted above, it is clear to me that the inability of people to answer these questions correctly is because historically their employer has managed their pension. I highly suspect that need for paternalism is endogeneously determined by paternalism itself. If I never learn how to drive I need someone to drive me to work. If I never need to learn how my money should be invested, I never will learn it, and I will need someone else to do it when a situation does arise.

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