When a Little Education Is Dangerous

A little financial education can be a dangerous thing, says one MIT professor of management. It gives investors a false sense of confidence in a world where complexity rules. “Perhaps better financial literacy among the public would help many people avoid such poor decisions. But increasing knowledge among investors can actually lead to unintended negative consequences, claims Gustavo Manso, an associate professor at the MIT Sloan School of Management, in a new working paper. Indeed, Manso and his co-author, Bruce Carlin, an assistant professor of finance at UCLA, conclude that modest increases in know-how for some investors damage other customers by generating an ‘arms race’ in which financial firms seek new profits by baffling all clients with ever-more arcane products.”