Ebenezer Scrooge Didn't Get Opportunity Costs

In “The Culture of Debt,” New York Times columnist David Brooks says something that should resonate with all of us in financial education.

Decision-making — whether it’s taking out a loan or deciding whom to marry — isn’t a coldly rational, self-conscious act. Instead, decision-making is a long chain of processes, most of which happen beneath the level of awareness.

I couldn’t agree more — particularly when equating financial decision-making with opportunity costs. What we decide invariably sets off a chain of events at the expense of/in lieu of other chains of events. And in the decision-making process, sometimes we're conscious of the opportunity costs, sometimes we're not. Brooks didn't state it that way, but he recognized that financial decisions (among others) result from a series of influences.

If you haven’t read the piece, you can guess correctly from its title that Brooks discusses our country’s consumerism and its impact on personal debt. In Sunday’s paper, Gretchen Morgenson examined the topic, focusing on it from the perspective of Diane McLeod — a 47 year-old drowning in debt. And with that story and the many comments submitted by readers as a backdrop, Brooks weighs in.

He divides the opinions on Ms. McLeod’s situation into two camps:

1. Credit card companies et al preyed on her, knowingly extending her credit that far exceeded her ability to pay back.
2. Ms. McLeod was irresponsible, knowingly spending well beyond her means just so she could feel better about herself.

I suspect that people in ALL camps recognize the need for more effective financial education, extending well beyond the Diane McLeods of the country.

Here's the thing, though ... too often financial education doesn't really help consumers make better decisions because the role and influence of opportunity costs within financial education tend to be both minimized and over-simplified. And while, I think it’s good for us to designate wants vs. needs (a common exercise stressed in financial education and first step in analyzing financial decisions), how often is a financial decision really that cut and dried?!

Here’s how opportunity costs come into the equation. A mentality of thrift and savings is a good thing, right? It’s certainly one that I wish were more widespread. However, I don’t think we want a world full of pre-Christmas Ebenezer Scrooges. His decisions to scrimp and save came at a terrible price on his quality of life and that of those people around him.

Ebenezer is an extreme and a fictional character, but he illustrates my point. The ways in which the opportunity costs of financial decisions manifest themselves are not limited to the impact on wallets, levels of debt, and balance sheets. Unfortunately, financial education far too often confines opportunity costs in that way.

In life, there are many influences that affect our financial decisions because they affect the desired outcomes we want and expect from our decisions. My influences and my desired outcomes may be completely different from yours. And with apologies to Stuart Smalley … that’s okay.

A financially-literate person is one who is aware of opportunity costs — they are at (or at least near!) the surface when making decisions. And the decisions factor in their likely impacts (short-term AND long-term) — impacts that extend beyond balance sheets.

Financial education and counseling shouldn’t shy away from a more nuanced approach to opportunity costs that better reflects the real-world. We should want people to reflect on what’s important to them and make decisions accordingly. Of course, that's not enough. Financial education and counseling should also provide the foundation of knowledge and skills that are necessary to understand the financial ramifications of their decisions.