June 28, 2011
Hubris Hampers Education Efforts
Most people think they’re above average when it comes to financial knowledge. And it’s not easy to educate people who think they know more than they actually do.
But hubris – or something like it – is what financial educators are up against, indicates research by professors Annamaria Lusardi at the George Washington School of Business and Olivia Mitchell at the University of Pennsylvania’s Wharton School. Their paper used data from 1,200 respondents to a survey they conducted for the Investor Education Foundation or FINRA, the self-regulatory agency for the securities industry. It may be the most comprehensive study on Americans’ financial literacy.
Seventy percent of the survey’s respondents believe they know more about basic financial concepts than most other people. But they scored poorly on the survey’s three rudimentary financial literacy questions. One-third to one-half of them answered the questions incorrectly or indicated they didn’t know the answers.
The results “paint a troubling picture of the current state of financial knowledge in the United States,” the authors said.
Further, this low level of knowledge, when combined with overconfidence about that knowledge, does not bode well for attempts to educate people about money and their personal finances.
Before I provide more detail about Lusardi and Mitchell’s findings, take the quiz yourself. Here are the questions1:
More than 35 percent answered Question 1, about interest rates, and Question 2, about inflation, wrong; and about half got Question 3, about investment diversification, wrong. (Wrong in this case means they picked the wrong answer, didn’t know, or refused to answer.) It’s difficult to imagine how many Americans can manage their household budgets, not to mention their 401(k) investments and retirement withdrawals.
These aggregate results for all survey participants masked much lower scores for the young, women, Hispanics, and the less-educated:
- Among respondents under age 35, more than half on Question 2 (inflation) and 61 percent on Question 3 (diversification) picked the wrong answer.
- Among women, more than half got Question 3 wrong.
- Hispanics scored lower than whites, African-Americans, and Asians on all three questions.
- Among people with only a high school education, nearly two-thirds got Question 3 wrong.
For more by Lusardi and Mitchell on the topic of financial literacy, read another of their working papers distributed on the National Bureau of Economic Research’s website.
1 Answers: a, c , b.