Which is the greater number: $105 or $100 plus 3 percent? You might think this a trivial question, but about 60 percent of adults can’t answer it correctly — and many of them still use financial services. It’s an alarming situation. After all, smokers understand they’re taking a risk, if only because they’ve seen the health warning on cigarette packs; but bank clients, especially in poorer countries, are often clueless about money matters.
Standard & Poor’s Global Financial Literacy Survey goes further than any of the previous research in examining the phenomenon throughout the world. It’s based on 150,000 interviews in more than 140 countries, all conducted last year. The study’s financial literacy criteria were rather loose compared to the ones developed in 2008 by two of the leading lights in this academic field, Annamaria Lusardi, currently of Dartmouth University, and Olivia Mitchell of the Wharton School of Business.
Lusardi and Mitchell asked just three questions to test for a basic understanding of compound interest, the effect of inflation on savings and risk diversification. S&P kept these three areas, and added the simple interest question. To be deemed financially literate, a respondent needed to understand three of the four financial concepts.
The questions won’t seem difficult even if you don’t remember when you last had to do sums in your head. Yet not a single of the four concepts got a majority of correct responses globally. Even in advanced economies, fewer than two-thirds of respondents got each of them right. S&P’s estimate of financial literacy throughout the world? A mere 33 percent.