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).


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)


(That's in Firefox 21.0)


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%.


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."


"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

David B. Finkelstein

"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:

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..


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.

Eric M. Jones

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.


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.


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


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.


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?


Ross Hartshorn

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.

Joe in Georgia

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.



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.


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.


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?


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.


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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