You Don’t Have To Go To College To Save Right

By Brigitte Miksa
Brigitte Miksa is head of International Pensions at Allianz and the Executive Editor of PROJECT M.

In our new research study which interviewed participants across 10 European countries, our team working with Annamaria Lusardi has demonstrated that financial and risk literacy leads to better choices when it comes to making decisions and identifying the right paths to our financial goals. We also show that the impact of financial and risk literacy on decision-making goes above and beyond that of education. And as in Olivia S. Mitchell’s recent findings, we confirm that women and millennials are least informed when it comes to financial and risk literacy.

Photo by William Iven on Unsplash

Financial Literacy Makes A Difference

To dig deeper into this topic, we have fielded some of the richest surveys on financial and risk literacy in the western world. The study covered 10 European countries and 10,000 respondents (1,000 per country).  We posed the “Big Three” questions widely used in prior financial literacy research, regarding compound interest, inflation, and diversification. To these we appended questions on risk concepts designed by Annamaria Lusardi and Peter Tufano.

Our results confirm that people are still struggling with the basics. Across all countries, 76% understand how interest rates work, and only 63% understand inflation. This is similar to survey findings in the US: 75% get the interest rate question right, and 59% understand inflation. These are sobering results. Financial understanding is also particularly poor when it comes to risk questions. In particular, only 15% understand the relationship between risk and return.

While previous studies have already highlighted that men outperform women when it comes to financial literacy, our study revealed that the gender gap is much higher in the case of risk related questions. The number of right answer to the risk questions is on average 31% higher among men, whereas when it comes to the basic financial literacy questions, the gap is only 14%. Interestingly, across all 10 countries analyzed, women are more likely than men to answer “Don’t know”. On average, the share of women answering “Don’t know” to each of the five questions is twice as high as that of men. Again, the gap between men and women in the “don’t know” answers is much wider for the risk questions than for the basic financial literacy questions.

Surprisingly, fewer millennials (those under 35) respond correctly to the basic financial literacy questions  – 40% –  than those age 50+ (64%). Even more concerning is that only 12% of the millennials got all three risk questions right, compared to 17% among the 50+. This is deeply disturbing, since most major financial decisions have to be made before people reach age 40!

A Role For Financial And Risk Literacy

These days, financial decisions are increasingly being made with the click of a mouse or the tap of a finger. So the next question is whether people who understand financial and risk concepts are better at recognizing which financial products are best suited to their needs.

As this question has not been explored before, we gave our survey participants three scenarios involving longevity, diversification, and liquidity risk, and then we asked them to choose the best financial product for the given situation.

Sadly, one-quarter of respondents did not get a single product choice right. Another 40% managed to make a single correct decision. Not surprisingly, those with a high level of financial and risk understanding significantly outperformed their peers, holding constant age and education.  They were also twice as good at answering a financial problem correctly. Even in the most complex of the three scenarios, an under-diversification setting, the share of respondents answering correctly was roughly five times higher for financially literate persons, compared to financially illiterate persons with the same educational level.

In light of the current US debate about whether financial education improves financial behavior, the results of our research strongly indicate that financial education makes a difference. Finance and risk literacy clearly improve people’s abilities to make financial decisions, choose between complex financial products, and custom-tailor solutions to their individual needs. This is true above and beyond the effect of education.

Our study shows that, beyond understanding the lessons from behavioral research, we must also invest in better financial and risk education. Women and millennials, in particular, will require special attention when it comes to devising financial and risk education tools. Societies, financial services providers, and employers will also need to shoulder some of the burden.


This piece was originally posted on February 15, 2017, on the Pension Research Council’s curated Forbes blog. To view the original posting, click here.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.