Dr. Annamaria Lusardi (left), the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College and a research associate at the National Bureau of Economic Research, spoke on conference call with the news media on Dec. 8 about the findings of a survey on financial capability by FINRA Investor Education Foundation. The survey is a long-term project that offers a tremendous amount of data on the financial capabilities of Americans and how their knowledge affects their behavior—as well as how the effect of geographic location affects people’s financial literacy.
AdvisorOne spoke with Lusardi separately after the conference call for more insights on people’s financial behavior.
Q: What did the overall results of the survey tell you?
A: People have difficulty understanding risk diversification. That was a really important finding: [whether they understand] how much we are exposed to risk and how important it is to insure against it. It’s the type of concept people have difficulties with. [We learned that] not just by people answering incorrectly, but also from a large proportion saying, “I do not know the answer.” … We have organized the questionnaire [so that the choices are] correct, incorrect, or “do not know.” That “do not know” [answer] is important evidence.
We looked at capability. When we looked closely at the risk-related concept of whether people put money aside as a rainy day fund, we found another lack of financial capability: Americans do not have a precautionary savings fund, which is defined as three months of income.
Q: Have you found any indication that people who know better do the wrong thing anyway?
A: Yes. It’s like having a driver’s license: even if you’ve passed the test, it doesn’t mean you’ll never have an accident. We do see data that indicate people with high financial knowledge do things of which they’re financially incapable, and vice versa. It’s not surprising, because there are lots of factors that influence behavior. [People aren’t] just driven by knowledge, but by a variety of factors. … [The data] allow us to understand behavior, taking into consideration financial knowledge and other factors.
Q: Were there data that surprised you?