Why financial laymen may learn better from one another

New research suggests that speaking to a similarly uninformed peer could help people get financially educated

Why financial laymen may learn better from one another

When people need advice, the logical option is for them to approach an expert rather than try to figure out a problem or issue by themselves. But based on new research published by the National Bureau of Economic Research in the US, there might be an exception when it comes to money matters.

The study began with a sample of 263 undergraduate students at the University of Birmingham in England, among whom more than 50% could not answer three standard financial literacy questions. As described in The Wall Street Journal, the researchers found that subjects with limited understanding of compound interest became more knowledgeable after seeking guidance from a similarly uninformed peer instead of someone with more financial sophistication.

Sandro Ambuehl, a co-author of the study and an assistant professor at the University of Toronto’s Rotman School of Management, told the Journal that the seemingly counterintuitive finding makes sense on an interpersonal level. People who can appreciate each other’s gaps in knowledge and reasons for misunderstanding, he explained, are able to have more effective communication.

Because people are less likely to feel intimidated by peers, it’s possible that they’re more open to asking questions and working through problems, ultimately leading to informed choices rather than simple parroting of financial experts’ advice and decisions.

“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.”

Acknowledging the study’s implications for policy around financial education, University of Pittsburgh economics professor David Huffman said that the researchers could have come up with more solid evidence for their interpretation of the findings. He noted that because financially sophisticated individuals have already figured out more aspects of money and investing, they may not have an incentive to engage in deep discussions about those topics with other people who are less informed.

The study — to which B. Douglas Bernheim of Stanford University, Fulya Ersoy of Loyola Marymount University, and Donna Harris of the University of Oxford also contributed — offers a possible lesson to financial advisors: using financial jargon and terminology excessively could actually hamper your efforts to educate clients.


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