Friday, September 10, 2010

Allowance & Incentives

Listening to NPR the other day I heard this story about "Allowance Economics: Candy, Taxes & Potty Training." I thought it was pretty interesting and that there was some fun math involved. In college I took at class on Law and Economics and I recall that there is a lot of thought that goes into how penalties are set (disincentives), for example speeding tickets. If you set them too low, people won't mind paying them and they will not work as a disincentive. If you set them high enough they should work well for the majority of people. There are also associated costs for enforcement, and people speed or don't speed based on some combination of the disincentive associated with the potential cost of being caught speeding and the likelihood of being caught. I know, from past experience, that when driving from PA to MA, I used to be particularly careful in CT because legend had it that their tickets where very expensive and their enforcement was good.

In this story, the parent is willing to pay for "essential" items, while the kids will use their allowance for "non-essentials." In addition, the parents levied a tax on "non-essentials" that were also bad for them, like candy. I was thinking it would be fun to play with various tax rates and models in which students would or would not be willing to buy certain items depending on the tax rate. Would they still by candy if the tax to their parents was 10% vs. 100%.

Tuesday, September 7, 2010

US Department of the Treasury Requests Comments on Financial Education Core Competencies

The Treasury Department has released a proposed set of Core Competencies for Financial Education and has asked for public comment on them. You can follow the links from the page above to see the competencies and how to submit your comments.

"The goal of the Core Competencies is to define what consumers should know and be able to do to successfully understand and make informed decisions about their personal finances." There are 5 "core concepts," which include: Earning, Spending, Saving, Borrowing and Protect and for each core concept relevant "knowledge" is listed and "action/behaviors." As I look at this list, I think about the mathematical knowledge that is needed for each action/behavior, or in some cases if mathematical knowledge is needed. 

Core Concept:  Saving
Knowledge: Saved money grows
Action/Behavior: Start saving early. Pay yourself first.

Core Concept:  Protect
Knowledge: Identity theft/fraud/scams
Action/Behavior: Protect your identity. Avoid fraud and scams. Review your credit report.

For Savings, there is a lot of mathematics behind why it's important to start saving early, but the habit of paying oneself first is more behavioral than mathematical (the behavioral economists have plenty to say about the best ways to do this and to automate it). Under the category of Protect, I would argue that there's some great mathematics to help consumers understand fraud and scams, but strategies to actually protect one's identity and to review one's credit report are not inherently mathematical.

I certainly don't think each financial education skills needs to have math behind, but as a math educator, it's nice to look at these topics to think of entry points for real world experiences into the mathematics classrooms.

What do others think when they look at the proposed core competencies?