To test basic knowledge on money matters, the FINRA Investment Education Foundation created a quiz with 6 simple questions that it believed should be easy to answer. The questions cover compounding of interest, inflation, and basic mortgage knowledge. You can take the quiz yourself here. If you get most of the questions right, all is as it should be.
But FINRA found that quiz takers on average could answer only half the questions correctly. In 2015, on a quiz with five of the same questions, only 37% of test takers could answer four out of five questions correctly. More alarming is that in spite of the poor test results, 76% of people rated themselves as “very high” on financial knowledge. People were simply far too confident about what they thought they knew but actually didn’t.
The consequences of poor knowledge are high. FINRA found widespread unhealthy financial behavior among those who claimed financial awareness: Though they rated themselves highly on money knowledge, people were borrowing unwisely, running up late fees on credit cards, and overdrawing their bank accounts. They also were vulnerable to less than upright lenders and financial advisers charging high or hidden fees.
You can argue whether FINRA’s quiz is asking the right questions. But it’s hard to not to see that we still haven’t cracked the code on financial literacy.
Studies like FINRA’s always spur calls for more financial education — and it’s true that more could be done on the knowledge front in school classrooms and otherwise. But we’re still a ways off from the right solutions.
The lessons of personal finance are actually pretty simple — you need to spend less than you earn and start saving early. The problem is that learning about compounding interest in a classroom doesn’t seem to change behavior.
Analogously, it can also be said that losing weight is conceptually simple — you just need to eat less and exercise more. But that’s easier said than done. The challenge is to eliminate the disconnect between what people say they know and how they behave.
The highest potential seems to be in programs that use behavioral psychology to better direct and automate good behavior. In the 1960s, Yale did a study where students received a lecture on the importance of getting a tetanus vaccination. Afterwards, most students said they were convinced and affirmed they would get their vaccination. However, only 3% actually followed through. When a second group was given the same lecture but also given a map showing where the campus health clinic was located, the number of students who got their tetanus shot rose to 28%. Simple steps like this need to be built into financial education as well.