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. tmeier says:

    I’ve noted my nieces and nephews have a better grasp of the principles of socialism than capitalism, they get taught the former in social history the latter they only pick up by reference to robber barons and oppression of workers.

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  2. Elena says:

    Other than the question about bonds, these items are a part of basic financial survival. Compounding interest, inflation, diversification of investments. Yes, I confess I have a business degree, but people have to have a clue that houses, rental rates, cars, gasoline, and food have had varying prices.
    Many people who are employed haven’t had a raise in 5 years, and have to be more judicious about their spending.
    How do we help teach people?

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  3. Zach says:

    I question the financial literacy of the people who designed the test. They asked about bond prices and then explained their answer based on resale value of a bond you bought before the rate change. If you buy a $100 bond before the rate change or buy a $100 bond after the rate change, you are paying the same price.

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  4. Ben says:

    I’d like to echo the earlier comments that knowledge and confidence have very little to do with each other (the Dunning–Kruger effect.) I am personally worthless with my finances, yet I score 5 for 5.

    A person who understands the concepts also understands what they don’t know, undermining their own confidence. The ignorant can substitute luck for knowledge, since they don’t know the difference. If they profit, they convince themselves they were smart all along, and who’s going to argue?

    I’d bet most of Bernard Madoff’s clients thought they were really clever and connected until they lost everything.

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