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The downside of literacy


Late last year, I came across an article by an American financial journalist called Morgan Housel which tackled the subject of financial literacy and literary stood it on its head in the process.

It is from Housel’s piece that the title of this article has been borrowed. The article’s interesting, irreverent approach in questioning what would normally be regarded as conventional wisdom caught my attention for two reasons.

Firstly, Zimbabweans have a reputation as some of the most educated and literate people on the continent, so as a Zimbabwean, anything that appears to question the value of education is likely to be of interest to me; and secondly as a financial columnist, the quest for financial literacy is a primary concern.

Given the background outlined above, I was kind of taken aback to read that according to Loyola Law School’s Lauren Willis in a paper titled Against Financial Literacy Education there’s “no reliable empirical evidence that financial literacy programmes are effective”.

Surely, all those hours of “Finance for Non-Finance Managers”, “How to Read the Balance Sheet” and other such presumptuous but well-meaning training interventions can’t have been in vain!

The paper proceeds to apportion blame for this anomalous situation to three possible reasons namely the poor quality of financial education, the fact that students themselves can’t be bothered and most importantly, the fact that financial products innovate faster than educational interventions can keep up.

This has created the tragic situation where for some consumers of financial services and products, financial education appears to increase confidence without improving ability, leading to worse decisions.

Apparently, financial knowledge in itself isn’t enough without the emotional intelligence of knowing when, and when not, to put that financial knowledge to use, something far more important, apparently.

And talking about confidence, or perhaps more accurately overconfidence, it has often been cited as one of the leading causes of failure in financial sectors.

A most appropriate example is the case of American hedge fund Long-Term Capital Management (LTCM) which when it failed in 1998, had within its 16-strong management team several Ph.Ds and two Nobel laureates.

“LCTM is an example of financial education being overridden by a swamp of overconfidence, hubris and a lack of common sense,” says Housel.

“The young geniuses from academe felt they could do no wrong,” wrote Roger Lowenstein in a book about failure called When Genius Failed: The Rise and Fall of Long-Term Capital Management.

Locally, this conjures images of ENG’s Gilbert Muponda and Nyasha Watyoka.

It has often been said that these are some of the country’s best banking brains courtesy of the National University of Science & Technology (Nust) who made a mark in local financial circles within a very short space of time.

Had they not been intoxicated with overconfidence they would have known where to draw the line and perhaps ENG could have been in operation today.

Instead, it is argued that they kept pushing their luck until it ran out.

Then there is Barbican Bank’s Mthuli Ncube, he of complex financial formulae and derivatives. Is he also another example of financial education tragically leading to poor financial decisions?

While there is no shortage of institutions that failed clearly because of a combination of lack of financial sophistication and the absence of the nuts and bolts of proper banking, such as the late Roger Boka’s United Merchant Bank, it is the likes of ENG and Barbican Bank that apparently failed in spite of high levels of financial literacy that boggle the mind and confound logic.

There are, however, saving graces in these cases, which potentially weaken the link between financial literacy and failure. ENG went through a “successful” liquidation process and after paying off all liabilities, the company even had some residual assets.

Interestingly, Muponda has launched a comeback bid and recently had an application for a banking licence turned down on a technicality.

Barbican Bank was recently re-licenced alongside Trust Bank and Royal Bank so can we say with certainty that its failure in the first place was essentially a failure of financial literacy on the part of Ncube?

So what’s the solution to the downside of financial literacy? Housel says that he doesn’t think that less financial education is the key. If anything, he argues, we need more financial education.

However, the catch is that such education must first and foremost teach about the emotional constraints of finance.

If he could make one recommendation to financial educators, it’d be this: Drop every financial course that includes Greek symbols, and replace it with a course on financial psychology.

This begs the question: What is the nature of education that banking and finance students are receiving in our universities?

Hopefully not the courses bursting at the seams with Greek symbols as mentioned by Housel, without a fair dose of financial psychology to put things in perspective.

The need to uphold the quality of financial education in our universities becomes even more critical when considered against the backdrop of recent developments, whereby an increasing number of banking and finance students are unable to secure internships/attachment opportunities owing to the challenges facing financial sector players.

Such opportunities would ordinarily enable them to relate their pretty Greek symbols to the practical, often ugly realities of the workplace.

The essence of attachment is to ensure that the burden of educating future bankers is shared between the universities and the graduates’ future employers.

It is, however, worrisome that quite a number of banks which traditionally enlisted a significant number of university students as interns did not do so last year and where interns were recruited, it was essentially tokenistic initiative.

Resultantly, some of banking and finance students end up serving their internships in work settings that are completely unrelated to banking and finance, just so they can proceed to the final year. When they eventually complete their studies, will they be ready for the job market for which they are intended?

In closing, I quote some interesting philosophical and practical aphorisms about financial literacy from another article by Housel:

Education makes the wise slightly wiser, but it makes the fool vastly more dangerous

To bankrupt a fool, give him more information. For some reason, this one reminds me about the Shona saying:

“Ukaravidza tsvimborume muto wegwaya, inofira kurukova” literally translated to “If you give a widower the opportunity to taste the bream’s gravy, he will die at the river trying to catch some fish.”

What I learned on my own, I still remember.
They teach about financial risk in school. If you still remember those equations, you’re either a finance professor or devoid of a life. Learning something because you experienced it is the most valuable form of education.

The calamity of the information age is that the toxicity of data increases much faster than its benefits.

Omen N Muza is a banker and managing director of TFC Capital (Zimbabwe) (Pvt) Ltd. He writes in his personal capacity. For feedback and your views on the issues raised in this article, please contact him on: omen.muza@gmail.com

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