Financial Literacy Low Among Vulnerable Populations: NBER

“These are pretty dismal findings, considering the complexities of the calculations involved in many financial decisions,” Lusardi wrote in the paper. “In fact, not just knowledge of interest compounding but even the capacity to do a simple interest rate calculation should not be taken for granted.”

Lusardi notes that young people are relatively financially literate. Almost 80% of people between ages 23 and 28 were able to correctly answer a question about interest earned in a savings account. Among the overall population, though, just 65% were able to choose the right answer.

The 2004 U.S. Health and Retirement Study found that literacy decreases sharply with age. Additionally, in some surveys, women were more likely to answer questions with “Don’t Know” rather than offering an answer, suggesting low financial literacy levels may indicate a “lack of confidence in financial knowledge rather than lack of actual Knowledge.” Lusardi also found that an investor’s family background may play a part in that person’s financial literacy. She found that among 23- to 28-year-olds, financial literacy was strongly correlated with their parents’ education. “In other words, financial literacy may start in the family, perhaps by observing parents’ saving and investing habits or by receiving financial education directly from parents,” according to the paper.

Several studies have shown that investors with greater financial literacy are more likely to participate in financial markets and invest in stocks; they are also more likely to choose appropriate mutual funds. A 2011 study by Lusardi and Olivia Mitchell found that those who can’t do an interest rate calculation were less likely to plan for retirement or accumulate wealth.