Sounds crazy (and hardly surprising), but too many participants get their financial advice from family and friends with low levels of financial expertise.
Not only is it through casual mentions, but many actively seek advice from those as ill-informed as themselves.
And here’s the kicker; it might not be a bad thing.
A new research paper found that individuals were better informed about basic financial topics after discussing the concepts with people who were similarly clueless (seriously).
The reason?
They largely speak the same language and are coming from the same place.
The paper, “Peer Advice on Financial Decisions: A Case of the Blind Leading the Blind?” from A-list scholars at Stanford University, Oxford and others, also found “peer-to-peer communication transmits financial decision-making skills most effectively when peers are equally uninformed, rather than when an informed decision maker teaches an uninformed peer.”
In performing the research, the authors set out to investigate whether such ignorant (for lack of a better word) influences are beneficial, harmful, or simply haphazard.
“In our laboratory experiment, face-to-face communication with a randomly assigned peer significantly improves the quality of private decisions, measured by subjects’ ability to choose as if they properly understand their opportunity sets …People with low financial competence experience greater improvements when their partners also exhibit low financial competence.”
In a particularly striking comment given financial education and wellness efforts recently, the paper added that “the provision of effective financial education to one member of a pair influences the nature of communication but does not lead to additional improvements in the quality of the untreated partner’s decisions, particularly in novel tasks.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
