hlz2 – I don’t think we’ll ever eliminate irrationality, but we might be able to prevent mass irrationality in one direction, if you know what I mean. Irrationality isn’t the end of the world per se, it’s when the market is severely irrational on average that’s the problem. Moreover, I think that getting people to undertake some common-sense thinking about their financial decisions can be really helpful, e.g., getting people to simply look at a projection of monthly mortgage payments under ARMs under a variety of scenarios might give them a sense for what risks they might face, instead of them getting surprised by events that aren’t really as surprising as they might seem. Or getting people to understand that picking stocks is a negative expected value exercise for most people, and that they should diversify their assets broadly, etc.

jaf2106 – I don’t think that the two are mutually exclusive, and I certainly didn’t mean to let the system off the hook- it’s clear that it has problems. I was just trying to focus on one aspect of the issue that I think has been under-discussed, and one that is, I think, more straightforward than the systemic problems, some of which might be really complex.

As for what the education should look like: well, there are lots of instances where laypeople (and trust me, I don’t mean this in a condescending way) make irrational decisions about financial matters (investing substantial proportions of their retirement assets in the company that employs them, not making full use of 401k matching funds, taking on credit of various kinds that could become unpayable given slight perturbations of various economic drivers) that I hope are driven by confusion/lack of information (if not, the people making these decisions are simply irresponsible). I think that assisting people with clearer, targeted information highlighting some of the salient points might be helpful, as might educating them to make sense of the wealth of information available.

This isn’t a particularly new idea – having experts synthesize and simplify information for non-experts is old news (e.g. crash test ratings, consumer reports). I’m just not sure that it’s been explored to its fullest extent in the financial arena.

Interestingly enough, Obama has mentioned this point in one of his policy positions (when I checked during the Dems primary): he suggested a credit card rating agency that would give simplified, digestible pieces of information to consumers about the different credit card options that they had available (I think his was a starred rating system or something). I think strategies like this might help everyone quickly parse through a cacophony of financial information to make smarter decisions more quickly.