Thursday, September 24, 2009

Financial literacy may take some time to achieve

In the aftermath of the sub-prime mortgage crisis, there have been a chorus of voices for greater awareness creation and protection to ordinary consumers about the dangers and risks inherent in complex financial products. Financial literacy has taken the front seat in most of the financial market reform proposals under consideration across the world.

An NBER working paper by Annamaria Lusardi, Olivia Mitchell, and Vilsa Curto (via Zubin Jelveh) draws attention to the shockingly poor financial literacy among the young - "fewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification". They advocate that providing financial education in high school may be particularly beneficial to children from disadvantaged backgrounds. They write,

"We found that most young adults are not well equipped to make financial decisions: only 27% of young people in our sample possessed knowledge of basic financial concepts including inflation and risk diversification and could do simple interest rate calculations. Financial illiteracy is not only widespread but is particularly acute among specific groups, such as women, Blacks, Hispanics, and those with low educational attainment."

However, Jelveh claims that we have not reached the level of financial maturity required to get people to think about "interest rates and inflation the way they think about, say, calories or the price of gas", and therefore a consumer financial protection agency may only "give people a false sense of security".

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