Financial Literacy and Academic Idiocy

You guessed it. This is a rant.

The Center on Philanthropy released a report last month titled Financial Literacy and Knowledge in the Nonprofit Sector. As badly as the nonprofit sector needs the academy to focus brains and careful attention on this subject, this report is hugely disappointing. But its errors and omissions are worth writing about.

First, the report is on a survey study eliciting voluntary response. The idea of assessing the competence of professionals through a voluntary survey is absurd.

Second, therefore, while the survey registered a 15.3% response, 84.7% did not respond. Nowhere in the report is non-response error addressed. The only caveat to be found is a footnote toward the end of the report in the section on methodology …

Third, the footnote says: This study is not nationally representative, but is instead suggestive (my emphasis) of the response of medium-size nonprofit organizations, that is with organizational revenue between $1 million and $5 million. The Chronicle of Philanthropy, incidentally, missed this important note.

Fourth, assessment of financial literacy was based on these three true/false questions:

  • If interest rates rise, bond prices will rise.
  • When an investor spreads money between (sic) 20 stocks, rather than 2, the risk of losing a lot of money increases.
  • Buying a single company’s stock usually provides a safer return than a stock mutual fund.

Seriously. There are a whole lot of questions specific to functions and responsibilities of financial managers in the nonprofit sector that are an awful lot more important than these. They would assess not so much literacy but knowledge and competency. They would get at financial professionals’ skill at managing not only the balance sheet but the balancing of competing interests endemic to nonprofit organizations:

  • Program, financial, and funding source strategies
  • Capital versus operating financial demands
  • Current program demands versus future requirements
  • Paid versus voluntary human resources
  • Free versus monetized services

We look forward to a study that begins by asking what is uniquely required of financial professionals to keep right the ships of nonprofit organizations.