By Janet Bodnar
From Kiplinger’s Personal Finance
Annamaria Lusardi, a senior fellow at the Stanford Institute for Economic Policy Research and co-author of the new study “Financial Literacy and Financial Education: An Overview,” discusses the ins and outs of financial literacy.
Question: First off, how do you measure financial literacy?
Answer: More than 20 years ago, we developed what we call the Big Three, a trio of multiple-choice questions to measure understanding of the ABCs of personal finance: compound interest, inflation and risk diversification. Since then, we have added these questions to almost every survey of consumer finances and other global surveys in countries around the world. The results in most countries are strikingly similar: very low levels of financial literacy that have not improved a lot over time.
Question: Does your research show a difference between men and women?
Answer: We find a persistent and large gender gap in almost every country. Women answer fewer questions correctly, and they are more likely to choose the “I don’t know” response. To test this, we have asked the questions again but without the “I don’t know” option. When forced to answer the questions, women tend to be right, but they’re not confident of their answers. We estimate that lack of confidence accounts for about one-third of the gender gap. This can make women too reluctant to take steps that can grow their wealth, especially in a high-inflation environment—for example, by investing in the stock market.
Question: Are there differences between age groups?
Answer: Financial literacy is particularly low among the young. That makes sense because they don’t have experience in the real world and don’t generally learn about finance in school. Early studies showed that financial knowledge tended to increase with age up to a point and then turn down. But in more recent studies, we don’t see financial knowledge going down with age. One reason may be that one topic we measure is inflation, and older generations have had more experience with higher inflation.
Question: What do your results mean for financial well-being?
Answer: Financial literacy is as important as reading and writing in our society, when you have to deal with making a budget, managing debt, planning for the future, saving for retirement. Building wealth doesn’t depend on income or luck alone. Financial literacy plays a role, too, and it’s not minor.
Question: What’s the solution?
Answer: Adding financial education in schools levels the playing field. Earlier studies didn’t find evidence that financial education works, which led to a lot of disappointment. But those studies were looking at very minor interventions—for example, giving people a brochure. When financial literacy is so low, you can’t address it by one brochure or one lecture. You need a full, robust course. More recent mandates for financial education in high schools have improved financial literacy scores and behaviors. Instead of classroom settings, programs for adults work better when they are tailored to target groups, are relevant to life situations and use digital delivery.
©2024 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.
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