I Was Told There Would Be No Math

In a 2009 NBC/Wall Street Journal poll, 8 in 10 Americans said they were concerned about the federal deficit and growing national debt.

But a separate poll that same year asked, "How many millions are in a trillion?" and 79% of Americans either answered wrong or didn't know.

Think about that. Eight in 10 Americans are worried about the national debt, but the same number can't accurately put the numbers into context. How do you know if $15 trillion of debt is dangerous if you don't know what a trillion is?

Deficits are something to be concerned about. But a bigger threat to your personal finances exists: innumeracy.

In a recent paper titled "Numeracy, Financial Literacy, and Financial Decision-Making," Dartmouth economist Annamaria Lusardi came to a shocking conclusion: Most young baby boomers about to enter retirement struggle with basic, real-life financial arithmetic. And those who need the most financial knowledge tend to be the most innumerate.

Here's an example:

"Let's say you have 200 dollars in a savings account. The account earns 10 percent interest per year. How much would you have in the account at the end of two years?"

Take your time. Feel free to use a calculator. What's your answer?

When asked, 82.2% of those age 51 to 56 couldn't produce the right answer ($242). Of those who answered wrong, about half erred by ignoring that interest accrues on both principal and interest -- compound interest.

That was one example of many. Given three basic questions on interest, division, and percentages, only a small fraction of those about to enter retirement could answer all correctly.

"These are pretty dismal findings, considering the complexities of the calculations involved in many financial decisions," Lusardi writes.

Dismal and scary. In 1979, 38% of private-sector workers were covered by an employer-provided pension plan that required minimal planning on their part. By 2008, just 15% were. At the same time, defined-contribution plans like 401(k)s that require workers to plan and manage their own funds ballooned, covering 43% of workers in 2008 from 17% in 1979, according to the Employee Benefit Research Institute. Unlike the past half-century, Americans' "retirement security will depend ever more on their own decisions" going forward, Lusardi writes. And yet look at where we are. Too many Americans still rely on a famous quote from the movie Reality Bites: I was told there would be no math.

But what's fascinating about all of this is that the standard response -- that we need more financial education and more emphasis on financial literacy -- may not be the complete answer. Lauren Willis at Loyola Law School has shown (link opens PDF) that financial-literacy programs can actually be harmful to people's financial wellbeing. How? For some, it increases confidence without improving ability. You can imagine someone taking a one-day class on derivatives trading and suddenly thinking they're George Soros, only to watch their portfolio disintegrate through hyperactive and ill-informed trades. That's an extreme example, but it captures how people actually behave. Put simply, there is "no reliable empirical evidence that financial-literacy programs are effective," Willis writes.

The key to getting people to make smarter choices with their money, then, may not be financial literacy or numeracy in itself. It's combing literacy with a proper understanding of the softer sides of financial knowledge -- things like behavioral finance, psychology, and emotional intelligence. Widespread innumeracy is a sign that financial education is lacking. But it's the emotions of finance that really influences how people manage their money.

Take a well-known example. In 1998, the hedge fund Long Term Capital Management, staffed thick with Ph.D.s and two Nobel laureates, exploded under an almost incomprehensible amount of leverage. Behind the failure was management's utter lack of emotional control. "The young geniuses from academe felt they could do no wrong," wrote Roger Lowenstein in the book When Genius Failed.

Warren Buffett later said this about the firm's 16-person management team:

"They probably have as high an average IQ as any sixteen people working together in one business in the country ... just an incredible amount of intellect in that group. Now you combine that with the fact that those sixteen had extensive experience in the field they were operating in ... in aggregate, the sixteen probably had 350 or 400 years of experience doing exactly what they were doing. And then you throw in the third factor: that most of them had virtually all of their very substantial net worths in the business. ... And essentially they went broke. That to me is absolutely fascinating."

The managers of LTCM had higher financial literacy and were more numerate than almost anyone on the planet. And they literally went bankrupt.

On the contrary, three years ago I interviewed hedge fund manager Mohnish Pabrai, whose track record puts him among the top money managers of the past decade. Pabrai doesn't use analyst teams. He doesn't use complex spreadsheets. There are no Bloomberg terminals in his office. I'd be surprised if he owns a calculator. When I asked him what his edge was, he replied, "Control over my emotions." That's it? I asked. "It's huge. You'd be surprised."  

Pabrai understands finance, of course. He's quite numerate. But it's the emotional intelligence he applies to that knowledge that allows him to make smart financial decisions while so many others make mistake after mistake. That speaks volumes about what a useful financial education should include.

So what's the solution? We do need more financial education that teaches basic numeracy, but that education should first and foremost teach the emotional constraints of finance. After all, it doesn't help to know what APR is unless also taught that bankers selling loans rarely have your best interest at heart. Knowing how to read a balance sheet doesn't help unless you also appreciate the biases that cause investors to buy high and sell low. And understanding compound interest won't help without conquering the social pressures that prevent people from saving money in the first place. We must focus on fixing America's innumeracy. But it's like Aristotle said: Intelligence without wisdom is worthless.

For more like this, check out my new e-book, 50 Years in the Making: The Great Recession and Its Aftermath, on Amazon for your Kindle or iPad. It's short, packed with data, and only costs a few bucks.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On February 21, 2012, at 2:28 PM, Hawmps wrote:

    Good stuff Morgan.

    I have often said that basic financial literacy should be taught in our high school curriculum. The answer I usually get is, "why do you think all high school grads need to go into the finance business?" which obviously misses the point of wanting to teach literacy. From which I usually reply, "so, you would rather have the banker teach your children about a mortgage or the car salesman teach your children about a car loan?" There is no reason why a high school senior can't understand how to balance a checkbook, how compound interest works, how to judge the difference between a car loan and a car lease, or how a mortgage amortizes. An 18 year old can legally buy real estate and should understand how a mortgage works. This would be much more valuable to a graduating senior going out into the world than say, trigonometry... save that class for a freshman engineering major. I would have much rather learned about the six functions of a dollar my senior year than sit through trig. I have seen many 20somethings set back over an unnecessary $500 car payment added onto their many thousands in student loans because "they could afford it".

  • Report this Comment On February 21, 2012, at 2:28 PM, TMFMorgan wrote:

    Sorry folks, part of the opening to this article was left out, if you're wondering why the first paragraph doesn't make sense. Should be updated shortly.

  • Report this Comment On February 21, 2012, at 3:08 PM, medicalquack wrote:

    It's worse than just math illiteracy with big corporations cashing in big time with using algorithms to make and move money. Consumers as i call it are under the Attack of the Killer Algorithms and I know math and code and I'm still under attack as well.

    When you have algorithms running on servers 24/7 making life impacting decisions and you can't see them, talk to them or worse yet get a customer service person to fix or understand them to help you, well you know what that is like.

    Here's about 20 chapters on how this works and makes billions for corporate USA with selling data.

    http://ducknetweb.blogspot.com/2012/02/attack-of-killer-algo...

    You wonder sometimes what the business models are and by example you take Walgreens who disclosed they made under $800 million on selling data on their 2010 SEC statement, what's with selling prescriptions, is this just an arm to get data? I think we need to license and tax these folks as states are doing it already for a mere pittance so why not go federal and get them to disclose some information too as you can't make laws to govern this on who writes what code but you can certainly make them pay back some to consumers, as they use Free Taxpayer Data to make millions and then launch data attacks right back on the the consumers.

    http://ducknetweb.blogspot.com/2012/02/start-licensing-and-t...

    This is technological war fare on taxpayers both who know math and those who don't, the algos get everyone.

  • Report this Comment On February 21, 2012, at 5:05 PM, TheDumbMoney wrote:

    Nice article.

    Of course, a possible related point is that it may not matter at all that Boomers are innumerate, assuming they have been making intensely conservative savings calculations (i.e., saving excessively all their lives) based on a pyschologically wise insight about the extent of their very innumeracy.

    However, anectodotal numbers relating to the average size of their 401ks don't seem to bear that story out, in my experience.

    DTAF

  • Report this Comment On February 21, 2012, at 5:23 PM, TMFZahrim wrote:

    That's what we get for letting Barbie educate the younguns:

    "Math is hard. Let's go shopping!"

    http://www.fool.com/investing/general/2010/07/21/google-is-b...

    Anders

  • Report this Comment On February 21, 2012, at 5:44 PM, Hawmps wrote:

    "Math is hard. Let's go shopping!"

    HaHaHaHaHaHaHaHaHaHaHaHaHa

    I almost fell out of my chair. Too funny... but too sad as well, 'cause it is so true.

  • Report this Comment On February 21, 2012, at 5:58 PM, slpmn wrote:

    A classic cartoon in the WSJ had a CEO looking at a piece of paper and shouting at his assistant, "A billion is a thousand million? Why wasn't I informed of this!?"

    We live in a nation in which the teaching of evolution is still controversial to a sizeable minority of the population, so gee, I guess I'm not shocked we're a little financially illiterate as a country.

  • Report this Comment On February 21, 2012, at 6:17 PM, seattle1115 wrote:

    Another excellent article, but it includes one grievous factual error. The line "I was told there would be no math" came originally from a Saturday Night Live sketch in which Chevy Chase portrayed Gerald Ford in a presidential debate.

  • Report this Comment On February 21, 2012, at 6:19 PM, smartmuffin wrote:

    The key to getting people to make smarter choices with their money is make them suffer the consequences of not doing so.

    The acrobat who performs without a safety net is going to be much more careful than one who performs with one.

    And yes, I did use the term "safety net" for a reason.

  • Report this Comment On February 21, 2012, at 6:21 PM, TMFMorgan wrote:

    <<The line "I was told there would be no math" came originally from a Saturday Night Live sketch in which Chevy Chase portrayed Gerald Ford in a presidential debate.>>

    Dang, thanks for pointing that out. As long as the errors in this article aren't mathematical, I'm happy. But thanks for clarifying.

  • Report this Comment On February 21, 2012, at 6:30 PM, FoolishVintner wrote:

    As a high school math teacher I am on the front lines of this battle.

    I see two problems. First and foremost, the most important education we can give students to boost their number sense is not in math, but in music. Study after study shows that music education cultivates higher math achievement (as well as greater civic involvement, lower lifetime addiction rates, higher verbal skills, and a host of other benefits). Nothing we can do as math teachers has shown to be as effective as raising math scores as music education. Not "response to intervention," not "data driven assessment," none of that eduspeak comes close to the success of music education in improving math scores. But of course, we are slashing music programs left and right in this country.

    The other problem is that our math standards emphasize the wrong kinds of math. I know that less than 5% of my students will ever factor a polynomial again after I give them their final exam. And even fewer will go on to take the Personal Finance course we teach as an elective, which will be relevant to every single one of them. What we make them do to graduate has the least relevance to their lives in the vast majority of the cases.

  • Report this Comment On February 21, 2012, at 6:37 PM, ETMatyahoo wrote:

    Wow, where in the world can I get a savings compounding at ten percent!

    Rats, it's hypotheticalland.

  • Report this Comment On February 21, 2012, at 6:48 PM, TheDumbMoney wrote:

    FoolishVintner:

    The real problem is this: why on earth is "Personal Finance" merely an elective course at your school in the first place?

    And what can be done to change that?

    DTAF

  • Report this Comment On February 21, 2012, at 6:49 PM, InvestWhatWorks wrote:

    Polls and people who report on polls...

    Saying "79% of Americans either answered wrong or didn't know" is completely incorrect statement.

    79% of Americans POLLED answer the question wrong or didn't know the answer. Emphasis on the word 'polled'.

    The two are not the same, even though many people seems to treat them as such.

  • Report this Comment On February 21, 2012, at 6:54 PM, TMFMorgan wrote:

    ^ There is a science behind polling and statistics incorporating adequate sample sizes where results can safely be extrapolated across populations with a high degree of confidence.

  • Report this Comment On February 21, 2012, at 7:12 PM, CrankyTexan wrote:

    >>> Think about that. Eight in 10 Americans are worried about the national debt, but the same number can't accurately put the numbers into context. How do you know if $15 trillion of debt is dangerous if you don't know what a trillion is? <<<

    Perhaps because the debt has never been this high before, and because we have to borrow money just to pay the interest on the loans.

    Or you could put the debt in simpler terms. The national debt is increasing by $2.7 million EVERY MINUTE.

    Most importantly, you make a good point. The national debt is so large, people cannot comprehend it.

    Or you could just show them this link...

    http://www.usdebtclock.org/

  • Report this Comment On February 21, 2012, at 7:49 PM, vidar712 wrote:

    I prefer a chart that is more visual:

    http://xkcd.com/980/huge/#x=-10804&y=-7116&z=6

    So the real reason for the Foolanthropy drive was not to help Thurgood Marshall Academy in Washington, D.C., and The Carpenter's Shelter in Alexandria, VA. But rather to make sure that they stayed less-privileged. That makes sense.

  • Report this Comment On February 21, 2012, at 8:38 PM, Merton123 wrote:

    Dumber then Fool made a good observation about how large most people's 401K are. The majority of people's saving plans after job moves, children, medical problems and so-forth will probably be social security if it is still around.

    The majority of stock pickers can't beat their respective indexes because of the laws of statistics - reversion to the mean. There are a few stock pickers who over the long run are able to pull nonrepresentative samples (e.g., Warren Buffet, Peter Lynch, and Jeff Neff). Maybe they were lucky?

  • Report this Comment On February 21, 2012, at 8:54 PM, innersmile wrote:

    To put these numbers and the deficit in perspective for even the most numbers averse people here is a tidbit I read in a Carl Sagan book years ago.

    If you were to count in seconds, then it would take roughly:

    12 days to reach a million,

    32 years to reach a billion, and

    32,000 years to reach a trillion.

    So as of now, our deficit is about 480,000 years worth of seconds counted. But according to CrankyTexan, that number is increasing by over a month's worth of counting with each passing minute.

    Better not think about it and just start investing because your compound interest will be doing the same thing eventually.

  • Report this Comment On February 21, 2012, at 9:09 PM, Revellsd wrote:

    "Let's say you have 200 dollars in a savings account. The account earns 10 percent interest per year. How much would you have in the account at the end of two years?"

    Part of the apparent innumeracy revealed by this question is most likely do to ambiguous wording. Specifically, this question does not state how often the interest is compounded (daily, monthly, yearly, every two years). I assumed yearly and luckily got the right answer.

    In my opinion, we (me included) all need to work on communicating in a clear and succinct manner. Part of communicating clearly involves making sure that everyone is using the same metric. A trillion could be a million million (1x10^12) or one million million million (1x10^18). To me it makes more sense to look at a nation’s debt as a percent of GDP which might provide a better prospective. It is all relative after all.

  • Report this Comment On February 21, 2012, at 9:36 PM, hbofbyu wrote:

    The purpose of education is to turn children (present oriented beasts) and turn them into future oriented individuals who understand the benefits of delayed gratification.

    You will never be good with money if you don't learn how to save first and then make your purchase.

    Unfortunately the phrase "Math is hard, let's go shopping", concisely defines the worst about the United States right now.

  • Report this Comment On February 21, 2012, at 10:00 PM, socgc wrote:

    I agree, great article. I do think there is a lack of financial literacy being taught at the high school level. I also think being able to control your emotions is important, but I think experience is something that is lacking also, I'm not sure how you can teach either of these things though.

    How many 21 year olds coming out of college have taken out a loan before? Even student loans you're handed a loan with a rate and that's that, most college students don't even think about it until 6 months after they graduate and realize they have to make the first payment (I know because this was me about two years ago!). Either that or their parents paid for their education and rent in which case they're probably even worse off (in terms of financial literacy)!

  • Report this Comment On February 21, 2012, at 11:31 PM, inkstainedwretch wrote:

    Best. Headline. Ever.

  • Report this Comment On February 21, 2012, at 11:32 PM, CaptainWidget wrote:

    I can't teach some 22 year old full grown baby I've never met how to calculate his interest payment, nor do I want to.

    It was his parents job at one point, now it's his own job. "we" do not need to teach anyone anything. If YOU want to teach him, that's great. You're good at that kind of stuff. But I (the I in "we") wants nothing to do with him. He's not my responsibility, nor do I want him to be.

  • Report this Comment On February 22, 2012, at 12:39 AM, kyleleeh wrote:

    <<Part of the apparent innumeracy revealed by this question is most likely do to ambiguous wording. Specifically, this question does not state how often the interest is compounded (daily, monthly, yearly, every two years). I assumed yearly and luckily got the right answer.>>

    The question clearly states yearly

    "Let's say you have 200 dollars in a savings account. The account earns 10 percent interest per year. How much would you have in the account at the end of two years?"

    See?

  • Report this Comment On February 22, 2012, at 1:03 AM, bornboring wrote:

    No math required on this one!

    When total debt reaches 100% GNP, it can be paid off with whole year´s earning, i.e. @100% tax rate, while leaving no food on the table, and no shopping possible.

  • Report this Comment On February 22, 2012, at 1:33 AM, NOTvuffett wrote:

    Let me make the math simple. There are a little over 300 million people in the country, so every billion of debt is about $3 for every man, woman, and child.

    A trillion is a thousand billion. As it stands now, the debt burden on each individual is about $45k. The administration's proposed budget would add $1.39 trillion to the debt. That would be about $4k for everybody. Would you borrow $4k a year for something of dubious utility?

  • Report this Comment On February 22, 2012, at 1:37 AM, CrankyTexan wrote:

    Unemployment just rose to 9%. It was "nice" while it lasted.

  • Report this Comment On February 22, 2012, at 1:43 AM, DR1P wrote:

    "Wow, where in the world can I get a savings compounding at ten percent!

    Rats, it's hypotheticalland"

    ETMatYahoo.. I'm not big on hypothetical, I prefer real world. If you really want to know where you can get it, www.warka-bank.com pays 10.5% on a 1 year CD. I've a little mad money in there for the past few years. It's all in how much risk you perceive it to be and how much you are willing to accept... just like any other investment.

    Morgan...Your example question was good, but a lot of the people nowadays have a hard enough time grasping the concept of "If your portfolio went down 10% and then went back up 10%... you didn't break even".

  • Report this Comment On February 22, 2012, at 3:47 AM, CaptainWidget wrote:

    <,The question clearly states yearly

    "Let's say you have 200 dollars in a savings account. The account earns 10 percent interest per year. How much would you have in the account at the end of two years?"

    See?>>

    It clearly states that the account pays 10% interest per year, but it doesn't state at all the rate at which that interest compounds. They are two totally separate things. A savings account that compounds interest dynamically will come up with a much different total (after the same period of time) than a savings account that compounds yearly. And they both exist I'm sure.

    Look up periodic compounding on wikipedia.

    Revellsd was correct, the question was missing critical information, making it impossible to correctly calculate the answer. I would be ashamed as a country if we let such a flawed study dictate our policy or thought process.

    Just another example of our elite thinkers not being so elite.

  • Report this Comment On February 22, 2012, at 5:16 AM, DR1P wrote:

    How about looking at it this way. If it pays 10% per year and you leave it in there one year, no matter how often it is compounded you will have $220 or it wouldn't have an APR of 10%. If you leave the money $220 in there for a second year you will get another 10% which will give you $242. I can understand a confusion if you were making more deposits or withdrawls, but the entire amount is staying in there for 2 years, 10% is 10%.

  • Report this Comment On February 22, 2012, at 6:30 AM, DR1P wrote:

    Oops, I threw in the wrong term. I said APR when the question, as it is written, is referring to APY.

  • Report this Comment On February 22, 2012, at 9:03 AM, poppix920 wrote:

    Carl Sagen's last book, "The Demon-Haunted World: Science as a Candle in the Dark foretold the hazards of a progressively ignorant citizenry unable to balance checkbooks, work in technology jobs and slipping back into superstition like Astrology to guide one's life. It was right on.

    We are getting so dumbed-down that our science and technology is understood by an ever smaller number of people, leaving it dangerously in the care of only a few. My own kids cannot figure out how the size of a yard a bag of fertilizer will cover, given the square footage clearly shown on the bag.

  • Report this Comment On February 22, 2012, at 9:23 AM, pondee619 wrote:

    "Let's say you have 200 dollars in a savings account. The account earns 10 percent interest per year. How much would you have in the account at the end of two years?"

    ZERO. That new Titleist driver went on sale for $200 the day after I made the deposit.

  • Report this Comment On February 22, 2012, at 9:59 AM, Harker207 wrote:

    Morgan, thanks for this. I'm writing my masters thesis right now on financial literacy programs for high school and junior high students. I've already cited the Fool once in the paper and I appreciate the periodic reaffirmation that this work is necessary and helpful. While I also read the Willis paper and have definitely seen the negative outcomes of small amounts of investor confidence, there simply is not enough longitudinal data available yet to ascertain the value of financial literacy programs for students, because it is not taught in a consistent, comprehensive manner. Numeracy is important, granted, but we do need to be seriously offering more tools of financial discernment to kids, especially if we're going to enable them to go into tens of thousands of dollars of personal debt for college.

  • Report this Comment On February 22, 2012, at 10:07 AM, ravenesque wrote:

    And no doubt this is a mere accounting error:

    http://michaelfury.wordpress.com/2011/11/11/pulverized-to-ne...

  • Report this Comment On February 22, 2012, at 10:25 AM, CommunityLadders wrote:

    This is hands down one of the best articles I've read on the subject. It's a well developed argument. Kudos!

  • Report this Comment On February 22, 2012, at 10:32 AM, TMFGinni wrote:

    Great comments here. So what can the Fool do to help solve this problem? I'm one of the folks here at TMF who works on our newly-expanded Foolanthropy initiative, the Fool's way of giving back to the world. We've stated our purpose as "To Prepare The World To Invest." We're getting started by developing free programs to help people eliminate credit card debt, and get started saving. Beyond that we're exploring other broader financial education ideas. How can the Fool put its talents to use to help create a more financially prepared society?

  • Report this Comment On February 22, 2012, at 11:20 AM, mtb297 wrote:

    Morgan hit a homer with this article. As a retired educator and former financial adviser I can attest that what he says is so true. And it is getting worse with kids no longer being asked to think. A solution might be to take away some of the tools and demand more.

  • Report this Comment On February 22, 2012, at 11:48 AM, seattle1115 wrote:

    @NOTvuffett: "As it stands now, the debt burden on each individual is about $45k."

    Not really. That's the gross number, obtained simply by dividing total debt by population. Remember, however, that the majority of that debt is actually owed to ourselves, either in the form of intragovernmental transfers or in the form of individual Americans holding Treasury debt. The net per capita obligation (if such a metric is useful for any purpose, which I rather doubt) is substantially less than $45K.

    Just one more example of why it's problematic for people to think of national finances as analogous in any way to personal finances.

  • Report this Comment On February 22, 2012, at 11:49 AM, DJDynamicNC wrote:

    "Let's say you have 200 dollars in a savings account. The account earns 10 percent interest per year. How much would you have in the account at the end of two years?"

    That depends. Was your account through MF Global?

  • Report this Comment On February 22, 2012, at 12:08 PM, wolfman225 wrote:

    @TMFGinni---

    "So what can the Fool do to help solve this problem?"

    How about a section added to the largely un-updated "Fool's School"? This could be a hybrid of the math involved in evaluating potential benefits/risks of certain financial choices combined with examples of how psychological factors can (and do) conspire to alter desired outcomes.

    As as example: you could show how reading and understanding a company's financials can help you extrapolate trends to help in deciding whether or not to invest and include how psycological factors such as "recency bias" can color an investor's appraisal of the information.

    Another example I have personally used to help get a younger relative honestly evaluate whether his purchase of a new vehicle was really as good a value as he thought: He had his heart set on the latest Harley. He was working at a fast food joint making barely $10/hr. The dealer had him convinced that he could manage the $300+ monthly payments (the bike's price was over $18k) simply by shifting his finances a little.

    He was resistant to every argument I used until I pointed out the total cost of the purchase as compared to buying a used (but still very nice) Honda for $4500. His focus on the monthly payment had blinded him to the true cost of ownership of such a toy. It also helped when I pointed out just how much money he could have at the end of the loan term simply by saving and investing the difference between the two payments in a simple index fund.

    He now happily rides around on his Honda and is the proud owner of his own investment account. He's also talking about using his savings to buy a more practical vehicle in a couple of years without having to take out a loan to do so.

    Such simple real-life examples could go a long way towards to getting young people interested in the subject of financial planning. If we can manage to get them to begin saving and planning for retirement at age 20 (as opposed to 40 or 50) they won't have to worry about whether or not Social Security will still be here. They will have multi-million dollar portfolios of their own and will stand as shining examples of what is possible for people to do for themselves. If we can get a majority of the young to prepare themselves this way, we'll simultaneously reduce the pressure on the public budget. A very helpfull side-effect, indeed.

  • Report this Comment On February 22, 2012, at 1:41 PM, devoish wrote:

    Great article.

    A rough count makes 37 different Fools replied to this post.

    If my math is weak, who are the other 26 from the poll that got it wrong?8/10= x/37

    Between the language of math and the ability to do calculations is why most Americans didn't realize that most peoples income was declining while well financed think tanks reported that America's average income went up.

    Steven

    PS. the correct answer to the fraction problem might have been 29.6.

  • Report this Comment On February 22, 2012, at 2:54 PM, CaptainWidget wrote:

    <<He was resistant to every argument I used until I pointed out the total cost of the purchase as compared to buying a used (but still very nice) Honda for $4500. His focus on the monthly payment had blinded him to the true cost of ownership of such a toy. It also helped when I pointed out just how much money he could have at the end of the loan term simply by saving and investing the difference between the two payments in a simple index fund.>>

    Ahhh the beauty of ordinal utility. It's amazing how quickly even very smart, educated financial analysts forget about it.

  • Report this Comment On February 22, 2012, at 3:55 PM, toastedseeds wrote:

    I am one of those BB that missed hte trillion/million question. Of course once I wrote the number down it was obvious. Part of it is I don't work with numbers, certainly not numbers that big. I took high scool math how long ago? Way long ago. So just teaching it in school is not enough. You have to be invested enough (pun intended) to take the time to understand what math you need to achieve your goals and refresh. Now if there was only a place that offered financial math 101 on the web?

    ts

  • Report this Comment On February 22, 2012, at 4:38 PM, DJDynamicNC wrote:

    I'd like to second the Wolfman's suggestions for additions to the Fool's primers.

    When I first started getting into investing, I devoured everything you guys posted in there. It's too short a timeline for me to say just how effective all that knowledge was, but the fact that I'm aware of that is itself evidence that you're doing something right.

    Adding some basic primers on reading balance sheets and making calculations to evaluate the health of a company would be a powerful addition (and apologies if they've already been added and I just hadn't noticed them).

  • Report this Comment On February 22, 2012, at 7:48 PM, CaptainWidget wrote:

    <<Adding some basic primers on reading balance sheets and making calculations to evaluate the health of a company would be a powerful addition (and apologies if they've already been added and I just hadn't noticed them).>>

    Agreed, I think that would be amazing. I've found very little 101 level concise information on how to evaluate a balance sheet sheet and income statement and make a rational decision as to the health of the company it represents.

    There's a lot of fragmented articles all over the web on various metrics, but bringing all that info into one spot would be a real value adder.

  • Report this Comment On February 23, 2012, at 12:33 AM, wolfman225 wrote:

    ^ and ^^ These subjects are covered in the Gardner's earlier book "The Motley Fool Investment Guide: How The Fool Beats The Street And You Can, Too". There are several chapters on the basics of understanding a business's financial statements. It would be nice to have an updated version, though.

    As I understand it, that kind of instructional analysis is only available now in the paid newsletters. It would be nice to have some little "teaser" chapters written up and posted for us noobs' basic consumption.

  • Report this Comment On February 23, 2012, at 1:13 AM, CaptainWidget wrote:

    Yeah, there's lots of security analysis books out there, but most people want you to pay for the knowledge. The CFA study materials are thousands of dollars.

    I guess that was kind of my point, that putting that information on their site for free couldn't possibly be a bad thing for their business.

  • Report this Comment On February 23, 2012, at 10:52 AM, DJDynamicNC wrote:

    ^^ Exactly. You can find this information in pieces around the web, but covering the basics in one place would give new investors a firm foundation on the mechanical side.

    There's enough out there that you can add plenty of value to the newsletters with advanced techniques while still providing a free primer on how to read a balance sheet and perform the basic analytical math functions.

  • Report this Comment On February 23, 2012, at 11:32 AM, TMFGinni wrote:

    Thanks for the stories and suggestions, Fools! If anyone else has ideas for how TMF can improve financial literacy (delivered in a uniquely Foolish way) we'd love to hear them.

  • Report this Comment On February 23, 2012, at 4:49 PM, KCinAustria wrote:

    A few comments I have on this article:

    1) I learned investing from this very website, starting in 1999. (The following 2 years of experience were infinitely valuable, including the 10-bagger I had which I still managed to lose money on!)

    2) I learned living below my means (and saving) from my parents.

    3) I also encourage an update of the Fool School with a quick primer for reading financial reports.

    4) An article on this website a few years ago explaining the importance of cash flow (& especially depreciation) with a make-believe toothpaste company was instrumental in my understanding of financial reports.

    5) The most useful book I've read to help me control my emotions while investing is 'The Intelligent Investor' by Benjamin Graham, with the commentary by Jason Zweig.

    6) Just two days ago I created a spreadsheet to decide if it would be a better financial decision to buy a plot of land (with 20% down, and pay the associated property taxes each year) or to just invest in stocks. Of course, I get to make all kinds of assumptions about the average 'returns' from land & stocks, but it was a fun, instructional exercise.

    7) I have a Ph.D. in an engineering field.

    8) The only finance class I ever took fulfilled a 'philosophy' requirement in undergrad: The History of Economic Thought.

    9) I basically self-taught myself how to read financial reports, with the help of 'The Warren Buffet Way' and a couple Peter Lynch books.

    10) I got the answer to the second question wrong. (I got so excited about 10% returns that I didn't notice it said 2 years!) =)

    11) I think 'InvestWhatWorks' may have a point about the sample size. I'm curious what is done to ensure that any given poll has a 'random' sampling of Americans? Couldn't it be that 'smart' people feel they have better things to do with their time than answer a survey/poll? Thus the poll is only representative of 'dumb' people with nothing better to do? Any thoughts, Morgan?

    12) Great article, and with some of the best comments I've seen in a while! Thanks!

  • Report this Comment On February 24, 2012, at 6:36 AM, Darwood11 wrote:

    Good article, and good comments.

    I've been reading Prof Lusardi's stuff for a few years now, after coming across a study she did for the SS administration on the problem.

    She has a blog and readers might be interested. The title of her blog is:

    "Financial Literacy and Ignorance

    What Do People Actually Know About Personal Finance? Not Much It Seems..."

    http://annalusardi.blogspot.com/

    Returning to this article, "We do need more financial education that teaches basic numeracy, but that education should first and foremost teach the emotional constraints of finance."

    Yes, that would be very important. My spouse is a professional educator and she and I frequently discuss the need to develop "critical thinking skills." She does her best to teach that, but it is an uphill battle. The attitude of many students (and their parents) is right in line with Barbie's comment "math is hard, let's go shopping." Or Ken's view that "math is hard, let's go play basketball."

  • Report this Comment On February 24, 2012, at 8:13 AM, NEMnyWtch wrote:

    LOVE Foolish Vintner's comment!! Although I am no teacher, I know this to be true. I have a child who has been in orchestra for over 5 years, and she is a high honors student who takes advanced math. For community service, I choose to volunteer my time to the inner city children's orchestra (trying to keep it going, it's in danger of cessation due to lack of funding).

  • Report this Comment On February 24, 2012, at 12:41 PM, TopAustrianFool wrote:

    "retirement struggle with basic, real-life financial arithmetic"

    Your whole idea breaks apart by the fact that 10,000 millions is NOT "real-life financial arithmetic". This proves that you don't have to be a Math wiz to know that if the number of the debt in dollars is unfathomable the nation is probably in trouble.

  • Report this Comment On February 24, 2012, at 12:48 PM, TMFMorgan wrote:

    Top Austrian,

    The opening poll results were meant as a standalone example of innumeracy. The quote you reference was related to Lusardi's real-life finance questions about basic interest.

    And the answer to the first is 1 million, not 10,000 :)

  • Report this Comment On February 24, 2012, at 1:12 PM, ETFsRule wrote:

    "TopAustrianFool wrote:

    "retirement struggle with basic, real-life financial arithmetic"

    Your whole idea breaks apart by the fact that 10,000 millions is NOT "real-life financial arithmetic". This proves that you don't have to be a Math wiz to know that if the number of the debt in dollars is unfathomable the nation is probably in trouble. "

    Thanks for the humor, this was a very clever post (I hope).

    Who says satire is a dying art?

  • Report this Comment On February 24, 2012, at 6:16 PM, alzbeta wrote:

    My parents shopping-proofed me early by having me divide the price of the object I was contemplating by my hourly wage. When I asked myself "Would I work half a year to have that?" the answer was often a resounding "No!" They pointed out that if you make payments, you will be paying MORE. The only things I have ever bought in installments are replacement vehicles in emergencies and houses, and have always paid them off more quickly than was required.

  • Report this Comment On February 24, 2012, at 6:29 PM, DJDynamicNC wrote:

    Those are wise parents, Alzbeta, and you are wise for embracing those lessons.

    Have a great weekend, everyone. Fool on!

  • Report this Comment On February 28, 2012, at 9:29 PM, TMFVicki wrote:

    TMFGinni --

    One thing you and the parents out there can do is point their kids at the Khan Academy finance videos.

    Sal Khan has done an awesome job of creating short, to the point videos that explain various topics. Among the finance videos are topics like "interest", "compound interest", "renting vs. buying", "pay day loans", "What is inflation", "real vs. nominal return".

    Vicki

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