How many of you can get all three of these following questions right (answers at the bottom of the post):
- Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow:
- …more than $102?
- …exactly $102?
- …less than $102?
- Do not know.
- Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy:
- …more than today?
- …exactly the same as today?
- …less than today?
- Do not know
- Do you think that the following statement is true or false? ‘Buying a single company stock usually provides a safer return than a stock mutual fund.’
- Do not know
If you got all three correct, congratulations – you’re in a global minority. In a US survey, less than half could answer the first two questions correctly, less than a third were able to answer all three. And this was for people aged 50 and over, who are generally more financially literate than the average population. The same questions have been used in international surveys, and the results are pretty depressing: across the globe, financial literacy is low, and especially low among the young. It doesn’t appear to matter whether you’re in a developed
The questions come from an NBER working paper released about a month back (abstract):
The Economic Importance of Financial Literacy: Theory and Evidence
Annamaria Lusardi, Olivia S. Mitchell
In this paper, we undertake an assessment of the rapidly growing body of research on financial literacy. We start with an overview of theoretical research which casts financial knowledge as a form of investment in human capital. Endogenizing financial knowledge has important implications for welfare as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little) people know and identify the least financially savvy population subgroups. This is followed by an examination of the impact of financial literacy on economic decision-making in the United States and elsewhere. While the literature is still growing, conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps. A final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy.
The paper is really a survey of the current state of research into financial literacy and its wider economic implications. Study after study finds that financial illiteracy is common, and in fact the norm.
Yet literacy in financial matters – especially in an increasingly complex and noisy financial system – and is what I would class as a life skill. I suspect that one reason why wealth inequality is so persistent, is through the uneven distribution of financial literacy.
Generally speaking, higher income (and wealthier) individuals possess greater degrees of financial literacy. There remains the question of causality (does literacy come first, or does greater wealth create the desire for greater literacy?), but there’s hardly anything controversial about investing in knowledge.
If there’s one thing that’s definitely missing from our education system – and from virtually everyone else’s – it’s mandatory financial literacy courses. This should be part of at least the secondary/high school curriculum. As it stands, financial literacy is almost entirely up to the parents, who might not be all that literate either.
Lusardi, Annamaria, and Olivia S. Mitchell, "The Economic Importance of Financial Literacy: Theory and Evidence", NBER Working Paper No. 18952, April 2013