The Magical Thinking of Financial Literacy

Financial decisions have become more complicated in recent decades. Furthermore, financial responsibility (college, retirement, healthcare) has shifted from the public sector to people. As a result, many households accumulate debt making it difficult or impossible to save. Financial literacy is a popular response to these problems. This paper argues that financial literacy is an inadequate solution to the systemic financial problems affecting households. We highlight the lack of evidence on financial literacy efficacy and the inadequate measure of financial literacy, and suggest an alternative approach to measuring financial literacy and dealing with the financial problems facing US households.