Social Science

And there's winners, and there's losers
It ain't no big deal
'Cause the simple man pays for the thrills, the bills
The pills that kill
--John Mellencamp

Was able to get thru this week's research conference without attracting the ire of other attendees. At least to an excessive degree...

At most universities, the bulk of education and research in personal financial education is not done in business schools. Instead, it is housed in schools of arts & science, public health, or the like. In days of old, this domain was commonly known as 'home economics.' Am pretty sure team leader Tahira Hira included me to add some diversity to the team based on what she knew about my academic background and publication record.

Like most lines of work, academic disciplines tend to attract people who are intellectually and emotionally good 'fits' with prevailing norms and beliefs that shape the field. In the domain of personal finance, its historical connection with social work attracts many who are sympathetic to the view that for profit businesses exploit consumers, particularly those in low income or minority groups. As such, terms like 'victim,' 'protection,' and 'underprivledged' surface frequently in dialogues.

Through this lens, initiatives to improve financial literacy can be seen as programs for helping those in need better cope with unfriendly environments. What became more evident to me this past week is that academic work in financial literacy goes beyond education and inquiry. It is activist in nature, seeking to influence public policy via government mandates and regulation--again assuming the normative view that consumers need government protection and assistance.

It was useful for me to experience the discussions involving this subject first hand. The lopsided nature of general assumptions that underpinned the conversation suggests opportunity in viewing problems thru a different lens. For example, a popular topic at the conference was the plight of consumers who were 'misled' into buying subprime mortgage products that were too complex to understand. As viewed by the majority of conference attendees, the consensus villians in the transaction were the big banks and mortgage brokers who unfairly preyed upon illiterate buyers in exploitive, profit-motive fashion.

As I heard them, the remedies to this situation as discussed by the conference crowd universally related to more, perhaps even mandatory, financial literacy education for the masses, plus more government regulation of these transactions--particular w.r.t. sellers.

One noteworthy thing about this situation is the lack of problem solving rigor--the desire to move from symptom to remedy without clear understanding of underlying causes. Now, to be fair, I should note that more than half of the 57 listed conference attendees hailed from non-academic institutions (e.g., government agencies, think tanks, lobbying groups, etc) and shoddy thought process like the above pervades this demographic. But I was expecting more from academics, whose primary objective should be pursuit of the truth thru formal inquiry.

The other noteworthy thing about this situation came from off line conversations w/ various attendees. The various questions I posed included the following:

If choices to mortgage buyers were too complex to understand, which was apparently easy to see by observers, then why didn't opportunity-seeking entrepreneurs come into the market with easier to understand products?

If mortgage brokers sold risky products to unknowing consumers because the brokers were only middlemen in the transaction (they didn't have to hold onto the mortgages they sold), then why did downstream buyers purchase them?

Where does the supply of mortgages and credit come from?

Few could comment on any of these. The most coherent remarks came from a woman who works in consumer education and research at the Fed. Point is that few if any attendees that I spoke with demonstrated solid grasp of the supply chain underlying the situation that they were eager to 'fix.'

This is a ticket to ineffective problem solving. Bad anywhere, but toxic in the hands of those shaping policy.

So perhaps some fresh eyes on the situation will prove useful. More to come.