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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).





How Much Financial Inequality Is Due to Financial Illiteracy?

Annamaria Lusardi, whose ground-breaking research on financial literacy has been featured here several times, has put out a new working paper (with co-authors Pierre-Carl Michaud and Olivia S. Mitchell) that could be read as laying much of the blame for the lack of household wealth at the foot of the members of said household. The paper is called “Optimal Financial Knowledge and Wealth Inequality” (abstract; PDF):

While financial knowledge is strongly positively related to household wealth, there is also considerable cross-sectional variation in both financial knowledge and net asset levels.  To explore these patterns, we develop a calibrated stochastic life cycle model featuring endogenous financial knowledge accumulation.  The model generates substantial wealth inequality, over and above that of standard life cycle models; this is because higher earners typically have more hump-shaped labor income profiles and lower retirement benefits which, when interacted with precautionary saving motives, boost their need for private wealth accumulation and thus financial knowledge.

Our simulations show that endogenous financial knowledge accumulation has the potential to account for a large proportion of wealth inequality. 

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Lottery Loopholes and Deadly Doctors: Full Transcript

Stephen J. DUBNER: There’s something Peter Tufano wants to know about you: “If you had to, could you come up with $2000 in 30 days?” That’s the question he asked a whole bunch of people in 13 countries, including the U.S.   Peter TUFANO: Why $2000?  Because an auto transmission is about fifteen hundred.   Most estimates […] Read More »





Financial Literacy Solutions, Information-Design Edition

In our latest podcast, “What Do Hand-Washing and Financial Illiteracy Have in Common?” we talked about America’s financial literacy problem, a topic we’ve written about before. In the podcast, two Council of Economic Advisers chairmen discuss the role of financial illiteracy in the recession. And economist Annamaria Lusardi and legal scholar Lauren Willis offer their solutions to the problem.

Two designers, Tristan Cook and Thomas Nelson of Humans in Design, also have a pitch. Read More »





What Do Hand-Washing and Financial Illiteracy Have in Common?: Full Transcript

Stephen J. DUBNER:  In the mid-nineteenth century, Vienna General Hospital was considered a world-class research center. But the hospital’s maternity ward didn’t have such a good reputation.   Sherwin NULAND: Because it became known throughout the city of Vienna that if you went onto the doctor’s division or the doctor’s clinic, you were much more likely to die. […] Read More »





What Do Hand-Washing and Financial Illiteracy Have in Common? A New Freakonomics Radio Podcast

Our latest podcast is called “What Do Hand-Washing and Financial Illiteracy Have in Common?” (You can download/subscribe at iTunes, get the RSS feed, listen live via the media player above, or read the transcript below.) It explores the idea that most problems are solved by more education — except when they’re not.

You’ll hear Michael Langberg, chief medical officer at Cedars Sinai Medical Center in Los Angeles, talk about why doctors there (and elsewhere) routinely fail to wash their hands despite the evidence suggesting they must:

LANGBERG: There’s something in the human condition that somehow disconnects what is really good evidence from personal choice and habit. And I don’t know why that is. I’m not a psychiatrist; my field is internal medicine. I just have the observation. Physicians are no different.

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More Depressing News on America’s Financial Literacy (or Lack Thereof)

I’ve written on the woeful state of Americans’ financial literacy a few times in the past. There is probably no academic researcher more attuned to the problem than Annamaria Lusardi of Dartmouth. This week’s NBER e-mail blast describing the latest crop of economics working papers includes nine papers; of those, four are written or co-written by Lusardi on this topic.

Among the highlights (or, I should say, lowlights); the bolding is mine:

Americans’ Financial Capability

This paper examines Americans’ financial capability, using data from a new survey. Financial capability is measured in terms of how well people make ends meet, plan ahead, choose and manage financial products, and possess the skills and knowledge to make financial decisions. The findings reported in this work paint a troubling picture of the state of financial capability in the United States.
The majority of Americans do not plan for predictable events such as retirement or children’s college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks.

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Macro Insights from the Brookings Panel

Today, I’m off at the spring meeting of the Brookings Panel on Economic Activity.  And for any serious student of the economy, it’s a great line-up of papers.  (Full disclosure: David Romer and I are the editors.  We commissioned the papers, so of course we love ‘em.) Rather than write about the papers, I figured […] Read More »