The myth of financial literacy

Published: Friday, May 23, 2014 at 12:01 PM.

Only thirty percent of Americans could answer the following questions correctly.

If you have $100 in a savings account and the interest rate was 2 percent per year, after five years, how much do you think you would have in the account if you left the money to grow? A) more than $102; B) exactly $102; C) less than $102; D) do not know.

If the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year, after one year, would you be able to buy A) more than, B) exactly the same as, C) less than today with the money in this account, or D) do not know?

Answer the following true or false. “Buying a single company stock usually provides a safer return than a stock mutual fund.” A) true; B) false; C) do not know.

The correct answers are A, C and B.  It’s pretty shocking considering the complex financial minefield Americans must travel. But I wonder if financial literacy is just more snake oil. Think about it, we teach reading, writing and arithmetic for 12 years so it’s doubtful a one semester course in high school helps very much.

It’s not what you don’t know that causes financial harm but what you know that’s not so. Seventy percent of Americans rate themselves with above average financial acuity despite the plain evidence, see results above. Taking a financial literacy course or being a CNBC zombie leads to overconfidence and oft times poor results. Despite the elderly having lower scores, perceived financial awareness increases with age.

Perhaps we are hard-wired to make poor financial decisions. In the 1970s, a Stanford researcher tested preschoolers’ willpower. He put them in a room with one cookie and told them they would get another one if they didn’t eat the first one before he returned. Only a third could resist temptation. Years later he followed up and found the ones who resisted eating the treat tended to make better financial decisions throughout their lives. A New Zealand study found kids labeled as impatient in classroom settings were more likely as adults to struggle financially. 

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