Someof the burden for repetition and reinforcement must fall on theprivate sector, particularly the financial industry itself. Morefirms need to make a commitment to integrate financial literacy intheir client-services operations. (Photo: Shutterstock)

(Bloomberg Opinion) — Graduation season will soon be upon us,and with it, so many admonitions explaining why students areunprepared for the challenges of the real world. Graduationspeeches will discuss the trillions in student-loan debt, whyspendthrifts need to stop buying lattes and why we all need to savemore money for retirement.

Someone will mention the miracle of compound interest,misattributing the quote to Albert Einstein, along with terribleadvice about “following your passion” and lots of otherwell-intentioned but equally worthless platitudes.

But the one that always grabs me is the lament about a lack offinancial literacy.

We looked at this a few years ago after the Financial IndustryRegulatory Authority's National Financial Capability Study foundonly a little more than a third of respondents in a survey wereconsidered highly financially literate.

This lack of basic understanding about money among a majority ofAmericans has been a consistent finding over the years. Look nofurther than the subprime-mortgage debacle and loans with teaserrates as an example of how awful things can get when consumersdon't understand the financial products they buy.

It is bad enough that most people are not financially literate,but the painful reality is that investor education doesnot work — at least not much beyond six months.

After that, it is like any other abstract subject taught in aclassroom, mostly forgotten.

Academic research has confirmed this. One research paper lookedat more than 200 studies, and reached the conclusion that thelessons of financial education are fleeting, and degrade quicklywithout frequent use.

Nobel economist Richard Thaler has suggested several behavioralnudges that might help; he too acknowledges the limits of teachingfinancial literacy.

Learning decays rapidly, so whatever we teach high schoolstudents is mostly forgotten by the time it's needed. By way ofexample, Thaler suggests trying to recall what you learned in highschool chemistry.

Not that this has stopped states from mandating financialliteracy for high schoolers.

The Washington Post reported last week that financial-literacyclasses are mandated by 19 states in order to graduate from highschool, up from 13 states eight years ago.

This is well-meaning, but without a radical break from howfinancial literacy is taught, it is destined to be ineffective.

Why? There are a number of reasons: The subject is abstract andcan be complex; specific skills deteriorate fairlysoon after graduation from high school; the rotememorization and teach-to-the-test approach used so much inAmerican schools is ineffective for this sort of knowledge.

There are some potential solutions for these issues:

No. 1. Hands-on education: Teachingfinance is not well-served by the standard format of classroomlectures. Instead, if we want to make students proficient inbudgeting, help them understand credit and teach them aboutinvesting, a better approach would be a learning experience fromreal life.

Student-run businesses on campus, and internships at localbusinesses, or actual jobs in finance do better at showing studentshow to do these tasks than the lecture-and-test approach.

No. 2. Repetition: Unless financialliteracy is constantly reinforced, as we noted above, it fadespretty fast. Core concepts need to be repeated and reinforced aftergraduation. It is not realistic for us to expect high schools to beable to accomplish this.

Some of the burden for repetition and reinforcement must fall onthe private sector, particularly the financial industryitself. More firms need to makea commitment to integrate financial literacy in theirclient-services operations.

The key is keep the basic concepts of compounding, cost drag,valuations, diversification and cyclicality in front of customers,ensuring that they understand and are familiar with the terms andconcepts.

No. 3. How to think: The idea ofgiving students a list of facts to memorize and then testing themhas been shown to be of limited use in real-life problem solving.This approach to teaching is the educational equivalent of fastfood.

A complement to the real-life experiences (above) is a moreSocratic method of instruction. Rather than mere lecturing,instructors should lead students on a guided hunt for information.Let the students figure out the ideas for themselves, with theinstructor as the pilot. This sort of approach leads to harder-wonknowledge, which tends to be more durable.

Rather than teaching a body of information to remember,education also needs to give students the skills to thinkcritically, to puzzle through problems, to be skeptical, to askquestions.

Unfortunately, this broader approach to problemsolving and independent thinking is rarely on thecurriculum, no matter the subject being taught.

Financial literacy is critically important, and will become moreso as social programs such as Social Security and Medicaid becomestressed.

If we continually fail to provide Americans with the tools tobecome and maintain financial literacy, we are asking for more ofthe kind of problematic behavior that contributed so much to thelast crises.

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