Financial life is not multiple-choice
Originally published on: April 22, 2016
Over the past century or so, literacy has expanded from something of an elite skill to a near-universal one. 86% of adults worldwide are now literate, according to the United Nations, with rates above 99% even in places like Kazakhstan and Tonga.
But in the modern world literacy isn’t enough. More recent research has also focused on the understanding of numbers and basic mathematics, or “numeracy.” These skills help us understand information and make decisions in everyday life, from reading infographics or comparison-shopping to scheduling and budgeting at work.
Here the news is not so good. A 2013 report found that nearly a third of Americans scored at the lowest end of a five-level measure of numeracy. The US as a whole ranked in the bottom three among the 34 “rich nations” of the OECD. What’s more, people entering and leaving the workforce has similar average scores. So while our homes and workplaces have become ever more numbers-driven, our skills have not improved in a generation.
One particularly important variation of numeracy is known as “financial literacy.” Economist Annamaria Lusardi’s research in this area looks at how well people understand basic ideas such as interest, compounding, and risk. One survey using three questions in a multiple-choice format found that only 44% of those with college degrees got all three right, and just 19% of high school graduates.
The researchers “thought [the material] was so simple, everyone would know these things,” and were surprised at the results. Those of us who have worked with retirement plans are not. As they note, in an epic understatement, “people who get any of the three questions wrong are unlikely to master trickier challenges like choosing the right investments for retirement.”
The authors go on to detail the massive impacts of financial illiteracy. A sample: fully one-third of the wealth inequality that separates rich and poor is simply due to a gap in financial knowledge.
On the bright side, they highlight the benefits of education. Because the concepts involved are fundamental, it’s important to start as early as possible. Because they’re practical, workplaces as well as schools are appropriate venues. We would add that because so many financial decisions happen online, the internet is a critical space as well.
As a nation, we seem to have figured out that things like STEM programs and coding camps are important preparation for today’s high-quality jobs. Now we need to dial it back, and acknowledge that basic numeracy and financial literacy are essential for any job.
Image courtesy Alberto G. via Flickr Creative Commons