The Persistence of Financial Illiteracy

Annamaria Lusardi, the doyenne of financial (il)literacy reseach (she has appeared on this blog and on Freakonomics Radio), is back with more depressing news.  The Wall Street Journal summarizes:

In fact, Americans’ grasp of concepts such as investment risk and inflation has weakened since the recovery began in mid-2009. Research released last week shows that on a five-question test (take the test here), respondents did worse in 2012 than in 2009. The average number of correct answers fell to 2.9 in 2012 from 3.0 on the test in 2009.

Unfortunately, the research indicates that most people aren’t aware of their own shortcomings:

Although many respondents were short on financial education, they didn’t lack confidence about managing their books. Researchers said they found “a disconnect between self-perceptions and actions in day-to-day financial matters.” Many people who gave themselves high marks for managing their finances also were using non-bank borrowing methods, such as payday loans, or had overdrawn their checking accounts.

On the plus side, more respondents indicated they were able to cover their monthly expenses (40 percent as compared to 36 percent in 2009).

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  1. CdrJameson says:

    Doesn’t help that if you put in the right answer to question 3 it marks it as wrong.
    (Did test three times, just to check)

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    • Cdrjameson says:

      (That’s in Firefox 21.0)

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    • Ray says:

      Worked fine for me (I checked Chrome and Firefox). Furthermore, I would hope that the actual study did not use the results from a web-based quiz open to anyone but used more scientific methods of selecting respondents and gathering answers.

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      • Cdrjameson says:

        How odd! Must be some weird config thing.
        Put in all wrong answers, then back to the quiz and now it’s fine.

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    • jcarico says:

      Confirmed in Chrome, The bond question does not correct record my response. Tried two times to confirm.

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    • Bill McGonigle says:

      Are you sure you put in the right answer? I’m up past my bedtime and read ‘bond prices’ but thought ‘bond yields’ (the relationship I most often encounter is interest rates vs. yields) and obviously got it wrong. -1 for wooly thinking on my part, even though I understand the relationship.

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  2. Ray says:

    60% of respondents said they could not meet their monthly expenses? Does anyone else find that shocking? I would have expected that number to be around 20%-30%.

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    • Cindy says:

      If you look in the article cited. It actually says: “41% of respondents still say they spend less than their income, 19% spend more than it and 36% spend roughly what they earn.”

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  3. RogerP says:

    “Many people who gave themselves high marks for managing their finances also were using non-bank borrowing methods…”

    Also known as the Dunning Kruger Effect

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  4. David B. Finkelstein says:

    “Although many respondents were short on financial education, they didn’t lack confidence about managing their books”

    -Sounds like a classic example of the Dunning-Kruger effect: http://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect

    Does it worry anyone else that these are the people voting for legislation, and the people that support legislation, such as increases in the minimum wage, the printing of massive amounts of money, subsidies for farmers to NOT grow food, and myriad other horrible economic ideas?

    It worries me immensely that our politicians cater to what the public wants while the public thinks that it’s a financially sound idea to get a payday/title loan..

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    • Robb says:

      I’m not sure that some of the examples you listed are always horrible economic ideas. Maybe today an increase in minimum wage would be negative, but to not have any increase ever again would also be a horrible econmoic idea. People differ about where those break even points are.

      Last I checked, politicians cater to what the campaign financers and party base wants, not the guy who can’t pay his bills.

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    • James says:

      The really sad thing is that the financial illiteracy is not an outlier. As far as I can judge, the average American is illiterate in just about every subject, possibly excluding spectator sports and the activities of “celebrities”.

      Wouldn’t it be interesting to live in a world in which the magazine racks at the supermarket checkstand held copies of Science and The Economist, instead of what they do?

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    • hmm... says:

      Semantics, maybe, but is there not a big difference between “managing finances” and having “financial literacy”? Financial literacy can mean anything.
      It’s easy enough to “manage your finances”. Basic accounting to track your spending and income to ensure that you spend less than you earn.

      But having the ‘financial literacy’ when making a significant financial decision (mortgage, loan, investiment) to understand what options are available beyond those options presented to us by whoever is selling it to us … and then to have the mathematical skills to truly understand the long-term benefit and cost of each option. That is different. This is a science like any other that one could study academically for their entire life.

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    • Dwight K Schrute says:

      Aren’t Dunning and Kruger on CNN?
      Sorry I couldn’t resist

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  5. Eric M. Jones says:

    I find it reprehensible that state governments support gambling (Lotto, etc.) as a means of finance. Sure, many people want it; but no financially literate people.

    And no, I don’t enjoy being okay financially and surrounded by the poor and homeless.

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    • Bengt says:

      I know the expected value of a $1.00 lottery ticket after tax is about 25 cents, but the 75 cent markup allows me to spend a couple of days daydreaming about the jackpot. Of course, I would never buy more than one ticket unless the jackpot is big enough to drive the expected value to a $1.00 as I don’t get any additional daydreaming value for the second ticket.

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  6. hmm... says:

    Vote (like/dislike?): should basic household finance (interest rates, loans, investments, mortgages) and economics be mandatory in high school?

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    • James says:

      Isn’t it already? Granted that it’s been a good few years since I was in high school, but I seem to remember learning such things.

      You need to remember that high schools are supposed to be teaching science, history, geography, English, and so on, yet it seems the typical adult manages to forget all this the day after graduation.

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      • buah says:

        I was in high school 15-20 years ago in Canada. Not a single mandatory finance course in 3rd or 4th year. There were only optional finance and economics courses. I took math & science electives instead to have my pre-requisite courses for an engineering degree.

        I have to agree with James above. How many people students would actually pay attention? And, like so many other things in an academic setting … how much information would actually be retained into adulthood? Then again … perhaps a student would be more inclined to pay attention to something that had an immediate effect on his/her life (such as finance) as opposed to something with a more abstract long term pay-off (such as science, geography, or calculus)?

        Also … there are many schools of economic thought. Would it be possible that “outside interests” (banks, insurance companies, and other financial institutions) would influence which school of thought is taught?

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      • pawnman says:

        @buah

        Even if students forget the specifics quickly after leaving, one would hope the basic ideas would stick. Just as I have long forgotten the dates of many historical events, but I can put the Renniscance, the Crusades, the American Revolution, and the moon landing in chronological order. When one is faced with these large financial questions (Roth or traditional IRA? Fixed mortgage or ARM? 15 or 30 year mortgage?), at least one has the basic knowledge to say “I remember we talked about this in high school, maybe I should at least read the paperwork before I sign up for this loan/investment”.

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  7. Ross Hartshorn says:

    Hard question for economists: does the fact that a degradation in knowledge of things financial, corresponds to an increase in the percent able to meet their expenses, perhaps indicate that an understanding of things financial is not the principal impact on their economic state? Management of impulse buys, for example, is not a question of financial wisdom (everyone knows they’re a bad idea), but it is a principal driver of their ability to avoid wracking up too much credit. Maybe people have less and less knowledge of basic financial principles because that’s not what they’re biggest financial issue really is.

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  8. Joe in Georgia says:

    How about the fact that financial companies keep modifying their products in order to keep the consumer confused and not realize the true cost of the products they are purchasing? These are the same crooks who created and continue to create products so unnecessarily complex that trained bankers (not to mention other astute folks like Warren Buffet) are unable to fully understand. These same people then sell you insurance on those financial products but are the only ones who can determine if you’ve actually incurred a covered loss. These products do not to be this complicated, they are complicated to hide the costs. Government mandated tools for comparisons such as APR vs APY, are circumvented are manipulated so as to be meaningless. To all purchasers of financial products, be careful, and good luck with that, because our federal government consists of the same bankers who monitor those institutions and has their back not yours. If that ain’t the fox guarding the hen house, I don’t know what is.

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    • James says:

      There’s a simple solution to the “too complex” problem: if you don’t understand it, don’t buy it. And if you do understand it, you probably won’t want to.

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