Financial literacy programs tend to be knowledge based; participants take courses or go through other programs aimed at improving their financial knowledge. When assessments are coupled with these programs they reflect this approach; the assessments tend to also be assessments of knowledge. This is often in the form of a knowledge test or quiz.

There is nothing inherently wrong with this approach. Indeed, there are reasons this approach may be favored. We know that people are going to act in the financial world: there aren’t many other options.

People work, and receive compensation.

They shop somewhere, they live somewhere, and they most likely drive. They are involved in financial transactions whether they wish to be or not.

Importance of Financial Knowledge

Logically, improving the knowledge of those participating in the financial system should improve their behaviors. This is the premise on which knowledge-based financial literacy programs are anchored.

Knowledge undoubtedly has value. There is value in knowledge for knowledge’s sake. Knowing is better than not knowing; there’s an inherent relative value.

Behavior doesn’t necessarily follow the same rules. Where knowledge without behavior doesn’t directly cause harm, behavior without knowledge can be dangerous. This is true outside the financial world, such as walking across the street without ascertaining if there’s traffic — which could be important knowledge to have.

Choose Your Best Match

It is equally true in the financial realm, where people make investment decisions without knowledge of the risks or perhaps without even a basic understanding of how the instrument works. Then they divest themselves at the wrong time, and perhaps stay out of the markets, causing themselves even further harm.

Knowledge can’t cause harm. But knowledge alone doesn’t create value. Behavior creates value. It is only when we act, or specifically choose to not act, that we optimize our results.

The role of knowledge

The place where knowledge has the maximum value, is when it informs behavior. Behavior informed by knowledge should be better than behavior in the absence of knowledge. Behavior produces results; better behaviors produce better results. Knowledge can be used as a tool to make better decisions, resulting in better behavior, and producing better results.

A constraint of many financial literacy programs is that they don’t have the means to access behavior. But they don’t need to ignore it either.

Financial behavior and financial knowledge, taken together, are a skill set: the skill to act in one’s own best interest in the financial world.

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Learning skills tends to be something we do hands on. Whether the skill is baking or plumbing, coding or diving, we learn skills by combining knowledge and experience using a building-block approach. We learn basic techniques, and we practice them.

We then learn more advanced techniques, and we practice those.

When we stop learning and we stop practicing, we stop getting better. We learn these skills by doing also by acting into excellence. We need knowledge, but also the need to practice the behaviors. In essence we need lab time. And in the financial world, life is our lab.

The Bottom Line

There’s a range of ways to present knowledge. A program can inform participants so that they know, for example, what a stock is and how it works. They may even understand the markets where you can buy or sell stocks, and how those function. That’s knowledge, and that’s important.

There’s also knowledge of how to use stocks and other investments, how they fit into an overall picture, what the risks and rewards are. This is also knowledge, and it’s important. And, more importantly, it is actionable knowledge. This is the knowledge that has a greater likelihood of informing behavior in a positive fashion.

In our endeavors to help people improve financially, we need to be cognizant of building skills, where we improve behaviors. Improved financial behaviors make better financial lives. Knowledge can be a foundation. Our aim needs to be to make the knowledge we are imparting actionable, so program participants can do well in the lab of life.

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