July 7, 2013

Are People Shockingly Bad at Finance Math or is The Economist Wrong?

I while back I reported that People Are Shockingly Bad at Simple Finance Math   That was based on an article in The Economist titled  Teacher, leave them kids alone

I quoted that article saying how 'only half of Americans aged over 50 gave the correct answer' to a simple multiple choice question about how much your savings account balance would grow / drop after 5 years if it paid 2% a year.

The question in question:
Suppose you had $100 in a savings account that paid an interest rate of 2% a year. If you leave the money in the account, how much would you have accumulated after five years: more than $102, exactly $102, or less than $102? And would an investor who received 1% interest when inflation was 2% see his spending power rise, fall or stay the same?

Easy right?   (if you got it wrong you probably over thought or misinterpreted the question)

I was shocked that only 50% of people would get that simple question wrong.

Then recently I saw Bargaineering asking How Financially Literate are You? and they gave a quiz from the  FINRA Investor Education Foundation National Financial Capability Study
I recognized that the #1 question on that quiz is the same simple question about how savings grows over 5 years at 2% a year.

I found the full report :  Financial Capability in the United States Report of Findings from the 2012 National Financial Capability Study

If you go to page 29 of the report they give the % of people who got each question right.   In 2012 a full 75% of people got the question correct.  Thats a whole lot better than 50%.    Of course only 75% is not great cause that still means that 25% of people got it wrong. 

Now I notice that the article in The Economist says that only half of people "aged over 50"  got it right.   So maybe older people do poorer than the rest of the nation on that question?    Well if you flip back to page 28 on the report they break down how well people do on the test by age group.   They only have 3 age groups :  age 18-34, age 35-54 and 55 or over.    The groups got scores of 2.3, 2.9 and 3.3 respectively.   The 55 and older group did the best on the quiz.

I think The Economist was wrong in its report.    The actual FINRA survey report shows 75% of people got that question right.

I noticed that The Economist article actually said : "a survey found that only half of Americans aged over 50 gave the correct answers."     They used 'answers' plural.   Made me wonder if they were thinking of all 4 questions.   But people over 55 didn't get all 4 questions right.  

I  later checked out the comments in The Economist article and found someone already pointed out the error there.    They cited this different survey How Ordinary Consumers Make Complex Economic Decisions: Financial Literacy and Retirement Readiness  available at NBER which says in its summary : "only half of Americans age 50+ can correctly answer two simple questions about compound interest and inflation".   So in actuality its 50% of people who get TWO questions right.  Not just the interest rate question.    If you browse forward in that report down to Table 1 on page 26 they give results for every question.    The group age 50 and over got the 'numeracy' question right 92.9% of the time.   The under age 50 group got it right 91.3% of the time.    That same article points out that this set of financial literacy questions have become  standard questions used in multiple such surveys.

I'm puzzled why the FINRA survey shows only 75% o people got the question right while the other study at NBER showed 91+ getting it right.   Thats a pretty huge difference in results between two studies. 

In any case The Economist article misstated things and people aren't so shockingly bad at finance math after all.

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1 comment:

  1. I have noticed this question and survey discussed in recent articles. I'm skeptical; this is like the 'survey' where more people believe in UFOs than Social Security solvency, or that Saddam Hussein caused 9/11, or the percentage of people that believe a pound of feathers is lighter than a pound of lead. It does make everybody who reads it feel better about themselves, though.

    Jim R, I noticed your comment about the 6% of the population who do not know if they have children. My guess is, the guy was joking. But who really knows (if he was joking, that is)? Anyway, thanks for breakdown; even a source like 'The Economist' can muff it now and then.

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