Missing the point on financial literacy

I see that Brian Gaynor disagrees with an article written by a work colleague of mine.  Usually I wouldn’t care in the slightest, as when it comes to issues of social justice it is important to get all these important points of view around soical value out in the open.  However, given that Gaynor simultaneously missed the point of the article, and then went on to absolve investors of any responsibility for their patent stupidity in his piece – I felt that I should jot down my thoughts.

There is two things I agreed with Gaynor on, one that Benje Patterson actually mentioned in his article in the first place, and another thing that is patently obvious.  These are (1)  Finance companies provided poor information, were poorly run, and incentive structures were awful (2) the term greed is subjective.

Now, Patterson laid these things down – however, while Gaynor seemed to imply that Patterson was laying all the blame for finance company collapse on investors, he was actually making a much less controversial claim.  He was saying that investors have to take some responsibility for their own money.

Gaynor might not think that people who invested ALL their money in one finance company paying 0.5%pa more than a bank, and then hoping for the government to bail them out if things went wrong were greedy.  However, I’m different – I think this sort of behaviour defines greed.

But it was more than that, if you were trying to maximise your expected return, the decisions people were making were patently stupid.  Many of these people who have been better off to leave their kids sorting out their finances, as they would at least have had to add things up more recently while in class.  Now, Patterson believes, and I agree, that individuals are smart enough to know not to put all their eggs in one basket – and they are smart enough to see that what they were doing is a gamble.  However, a lack of financial education mean’t that individuals didn’t realise all the awesome alternatives that were available.

Patterson’s primary point was simply that, if we had improved financial literacy in recent decades, we wouldn’t have a bunch of people who put all their money in a finance company (which was equivalent to a roulette table).  It was their funds, and they have to take some responsibility for the fact they put the money there.

Now, were these companies immoral, lacking transparency, dishonest etc – hell yes.  Do we feel sympathy for people who were manipulated into losing all their money – hell yes.  Do we think basic financial literacy would have helped the situation – hell yes.

And that is why I find Gaynor’s article so insulting – he is choosing to ignore the fact that people chose to put money in these companies and lost it all, and so he is ignoring one of the clearest, cleanest, and fairest solutions we could put in place in order to prevent this happening again.  In his determination to insult finance companies, he is willing to leave future investors vulnerable to future snake oil merchants – and that isn’t cool.

  • D.J.Taylor

    I like (hate?) the fact Geynor has skim-quoted from your collegues article to fit the tangent of his own argument while similtaniously ignoring (misrepresenting?) the actual points your collegue was making. Perhaps he needs to address the personal “literacy” issues he himself seems to have.

  • Nigel Pinkerton

    Just because people were lied to about the level of risk, does not mean that better financial education couldn’t have saved some investors from loosing so much of their capatal (spliting your money between three finance companies is not diversifying people).
    “Do we feel sympathy for people who were manipulated into losing all their money – hell yes”.  The main reason I feel sorry for them is they were generally conservative investors – older people or what we like to call “mum and dad investors”.  Its hard to feel for people who chase risky investments for high returns and fail.  But these people thought it was as safe as the bank.  There is plenty of blame to go around for that.

  • dragonfly

    When I was in my early twenties (in the early eighties) I had some money I put into finance companies. I did this because the interest rate they paid was higher than that paid by the banks. Even I, who was utterly financially illiterate at that age, understood that the higher return corresponded to higher risk and I was always anxious about the possibility that I would never see my investment again. Anyone who claims to have not understood that higher risk is associated with higher returns is either lying or unbelievably stupid.

  • Gary GC

    A particularly good comment on the Herald article directed at Brian Gaynor and written by Bretto from Remuera (naturally selective quotation has been used as Gaynor seems to like this):
    “Firstly, “Patterson seems to imply that all investments, with the exception of bank deposits, are greedy.” No, according to your quote he says “some investors” were greedy.”
    “I would suggest that you [Gaynor] stick to your day job, but given that you’re supposed to be involved in asset management, that might not be such a good idea.”

  • Greg

    One party that seems never to be mentioned in the media is the role of the media itself, and newspapers in particular.  There certainly seemed a reluctance (pre-collapse anyway) for journalists to label any finance company as potentially more risky than advertised, likely not wanting to bite the hand that feeds them.  So while it’s easy (and valid) to chastise investors for their lack of financial literacy, it would have been nice to have that chastisement in advance, not just in hindsight.

  • http://www.sustento.org.nz Raf

    It seems to me that there is a lethal mixture of elements here: heavy media influencing (yes this does make a big difference), poor professional financial advice, search for high yields (greed?), poor understanding of the actual investment (this is the financial literacy issue) and I think also, a constituency that was used to high yields and though property was solid as :-)

    I think we could also add in some seriously poor regulatory oversight (the people who should know about the problems did know…..and sat back and watched. Anyone remember Deborah Hill-Cone’s NBR article on Hanover back in 2004? I do…I wrote to all and sundry about my concerns back then).

    Of course, at the core of this issue is “caveat emptor”: investors should think carefully about where they put their money. Sadly, people invest on recommendation and use trusted networks to help them make decisions (think Bernie Madoff) and rarely look closely themselves. Whilst blame and recrimination can be spread around, the buck must stop  with the individual investor (obviously where they were clearly misled, there should be availability to recompense). 

  • http://www.tvhe.co.nz Matt Nolan

    Good points, all of you.  Good stuff!