May 11, 2011
High School Influences Life Knowledge
It’s been well-established that most people have low levels of financial literacy and struggle to manage and plan their personal finances. Now two Wisconsin researchers have taken the conversation to the next level by trying to explain why.
According to their study, featured in a webinar posted online today, the financial literacy of people entering retirement is significantly determined by high school IQ level or by whether the individual took high-level math classes in school.
University of Wisconsin professors Pamela Herd and Karen Holden arrived at this finding by analyzing 6,000 individuals from a unique longitudinal data set of people who graduated from Wisconsin high schools in 1957 – and were in their mid-60s at the time of the study.
“Financial literacy” is a fuzzy term but it was measured three ways. There were 14 questions about the subjects’ financial assets. The researchers also asked them to specify how much they had in savings, checking, and money market accounts, and how much they had in their retirement accounts. The higher the percentage of accurate answers, the higher their financial literacy score.
After controlling for sex, age, and race, they found that college graduates who took higher-level algebra, trigonometry, or physics scored higher on financial literacy measures than those who did not. Among those without a college degree, however, those with the higher IQ scored higher.
“Cognition matters. Early life cognition measures are strongly associated with my late-life [financial literacy] measures,” Herd said.
Among college graduates, for example, individuals who had taken more algebra courses, as well as trigonometry or physics, provided exact dollar values for 1.6 percent more of their total assets than those who had less math. The meaning of this is still unclear, however, the authors noted: “We cannot rule out the possibility that the link between math classes and financial literacy is the product of intrinsic quantitative capacity rather than something learned.”
Among those without a college degree, their results showed that 81 percent of those with an IQ above 120 knew the value of their retirement plans, compared to 63 percent of those with IQs of 70.
Gender also mattered. The study confirmed other research showing women are not as financially literate as men.
So the question remains for future research, “What’s going on with gender?” said Jean Hogart, a Federal Reserve Board research manager who moderated the webinar.
To read a summary of the paper, click here.
To read the entire paper, click here.
Also, to view a video of Holden’s fascinating talk in November on a related topic, “The Psychology of Financial Literacy,” click here.