How Financial Knowledge Drives Wealth Inequality

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How Financial Knowledge Drives Wealth Inequality

What differentiates the financial success stories from the others turns out to be exposure–in school or the workplace–to financial education, says WSJ Wealth Expert Olivia Mitchell of the Wharton School.

Financial knowledge plays a crucial role in shaping wealth inequality, according to a new study that my co-authors and I just published in the Journal of Political Economy. Our work was prompted by the fact that Americans increasingly must manage their own financial affairs throughout their work lives and then in retirement. Yet financial products are becoming ever more complex and difficult to understand, particularly for those without an M.B.A. As a result, the ill-informed who must take individual responsibility for their finances can get into long-term, and potentially very damaging, problems.

For instance, many financially unsophisticated people incur high fees and use high-cost borrowing, including rent-to-own and payday loans. They also report that their debt loads are excessively burdensome, and they cannot handle their debt. The least informed also borrow more, and more often, from their retirement accounts, and they are likely to default on these loans when leaving their jobs

Read more: How Financial Knowledge Drives Wealth Inequality – The Experts – WSJ