That’s rich: More Americans think they know finance today, but is it really true?

COLUMBUS, Ohio — Who ever said you need to understand money to spend it? Researchers from The Ohio State University find financial literacy is on the decline in the United States, yet somehow, more and more Americans are simultaneously feeling quite confident about their financial acumen.

Between 2009 and 2018, researchers surveyed different groups of Americans regarding their objective financial knowledge on four occasions. As more time passed, scores progressively worsened. Meanwhile, though, the percentage of people believing they were above average in financial literacy increased from roughly 15 percent in 2009 to almost 21 percent in 2018. However, these individuals actually scored lower than average on the test

“The results raise the question of whether we’re doing enough or doing the right things to educate the public about the basics of finances needed to run a household,” says study co-author Sherman Hanna, an Ohio State professor of consumer sciences, in a university release. “Not only are scores on a measure of financial knowledge declining, but a growing number of people think they know more than they do.”

Quizzed about money, more people answer ‘don’t know’ now

In collaboration with with Kyoung Tae Kim of the University of Alabama and Sunwoo Lee of York University in Toronto, Prof. Hanna used data from the National Financial Capability Study (NCFS) to research the financial acumen and beliefs of Americans. The NCFS is run by a private corporation, the Financial Industry Regulatory Authority, and conducts interviews with Americans from each state every three years focusing on financial knowledge and behavior.

The study included datasets collected in 2009, 2012, 2015, and 2018. Each one of those datasets encompassed between 25,000 and 29,000 Americans. Surveys included five multiple choice questions measuring objective financial knowledge. The questions covered topics such as interest rates, inflation, bond prices, mortgages, and financial risks. Study authors were also sure to account for various additional, possibly influential characteristics like age, race and ethnicity, and education.

Still, the trend was undeniable: financial knowledge declined in all four waves of surveys. Moreover, researchers say this observed “decline in knowledge” was confirmed in a number of different ways. For instance, one of the multiple choice options on all questions was “don’t know,” which gave participants the opportunity to respond without guessing. Study authors explain the amount of “don’t know” responses increased slightly between 2009 and 2018.

“We were seeing more people who admitted they just didn’t have a clue about how to answer some questions,” Prof. Hanna adds.

Many Americans fake it until they make it

Respondents had to rate their “overall financial knowledge” on a scale of one through seven. The results indicate respondents in 2012 and 2015 thought they knew more about finances than those in 2009, even after researchers controlled for other characteristics. However, respondents surveyed in 2018 were not significantly different from those in 2009 regarding how much they thought they knew about finances.

The research team was able to calculate just how overconfident respondents were about their financial knowledge by comparing objective test scores with self-ratings of financial literacy. All in all, the confidence level among respondents “bounced around a bit,” with no clear trend emerging. However, when study authors looked at the percentage of people who were overconfident, they note that it did increase from 15 percent 2009 to roughly 21 percent in 2015, before staying at about the same level in 2018.

“It is interesting that we have more Americans who are overconfident in their financial abilities at the same time they give more ‘don’t know’ responses to questions in the survey. We need more research to figure out why that is,” Prof. Hanna comments.

While this work clearly indicates financial literacy is on the decline among Americans, study authors can’t say at this time exactly why this is happening. One possible explanation is the well-documented decrease in math skills in the United States.

“To a great extent, financial literacy depends on math ability,” Prof. Hanna says.  “If you can’t do simple math, it is difficult to figure out how much money you would earn in a savings account at a certain interest rate.”

Is the financial world just changing with the times?

Alternatively, the questions on the survey may not be as relevant to the average American’s life as they used to be, researchers speculate.

“Many Americans are struggling to pay rent, let alone being able to afford a mortgage, which one of the questions is about.  Another question is about investing, when many people have to worry more about paying credit card debt than investing extra savings,” Prof. Hanna notes.

The study author adds that it may be useful to find ways to help the public without relying on detailed financial knowledge. For example, plenty of companies nowadays offer default settings for employees that invest a certain amount of their salaries into 401Ks automatically.

“Financial knowledge is good, but our ultimate goal should be for better financial outcomes. We need to find ways to help people make better choices,” the researcher concludes.

The study is published in the Journal of Financial Counseling and Planning.

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