Can Your Clients Answer the 'Big 3' Financial Literacy Questions?

Another finding Lusardi and Mitchell emphasize in their work is that financial illiteracy is not only widespread in the general population, but it also differs markedly across demographic groups, potentially contributing to other types of economic inequality.

One table in the new report, for example, compares financial literacy levels for women and men. The pair measure a sizeable gender gap for each of the financial literacy questions separately, as well as for the overall “big three” score.

Specifically, women are 8 percentage points less likely to respond to the interest rate question correctly, 10 percentage points less likely to know about inflation and 17 points less likely to be knowledgeable about risk diversification than men. Overall, only 29% of women answer all three questions correctly, versus 48% of men.

Lusardi and Mitchell further spotlight discrepancies in literacy measured across age groups, with younger Americans being significantly less financially literate, and by race and ethnicity, with Black and Hispanic Americans being particularly disadvantaged regarding knowledge useful for day-to-day financial management.

A Framework for Improvement

Lusardi and Mitchell say their research offers useful insights about what financial literacy courses should teach if the goal is to improve people’s lifecycle decision-making.

“For example, the ‘big three’ tell us that most people do not grasp key fundamental financial concepts, particularly financial risk and risk management,” the pair write. “We advocate covering these topics extensively and rigorously in literacy courses, building first on simpler concepts.”

According to the analysis, people must make many consequential decisions that require them to know about specific financial instruments and contracts, such as student loans, mortgages, credit cards, investments and annuities. Consumers must also be aware of their rights and obligations in the financial marketplace, Lusardi and Mitchell write.

“Moreover, planning for the future often requires complex calculations,” the pair explain. “Our research shows that much can be done to help people make savvier financial decisions.”

According to the NBER researchers, acquiring financial knowledge is a lifelong process, and for that reason, financial education will ideally also be provided after people leave high school or college. They say one approach that’s finding increasing favor is via the workplace, with such education offered in coordination with DC-style retirement plans.

Given that the costs of financial education programs need not be high, employers may find it beneficial to provide financial education for their employees, the researchers conclude. Moreover, as there are large differences in financial knowledge across demographic groups, one size will not necessarily fit all.

“For this reason, providing tailored programs will better address the needs of specific groups,” the researchers suggest. “For example, some of the observed gender differences in financial literacy may be due not only to knowledge, but also to self-confidence. Programs targeting women could therefore try to promote both.”

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