This podcast was recorded on Oct. 5, 2016.
David Gardner: So we both live in the Washington, D.C., area in the United States of America. We would hope, for our country... We have listeners all around the world. I would think that all of us would hope that every one of our citizens -- our fellow citizens -- would know the correct answers to all three of these questions, and I suspect we have a fair number of Rule Breakers listening, right now, who are patting themselves on the back saying, "I nailed it." But wow, to think that only half of the population here in the U.S., gets as many; [that] less than half can get all three right suggests there's a lot of work to do.
I want to go to that in a second, Dr. Lusardi, but I want to start by asking how does everybody grade at? So which are the countries that do best (you've asked this question of many different people), which are the ones that do worst, and any reflections that you have based on the data?
Annamaria Lusardi: So we have asked these three questions, now, in as many as 15 countries. And we have called this project "Financial Literacy Around The World," and if you look at the acronym, it becomes "FLATWORLD" for "Financial Literacy Around The World." So we say the world is flat when it comes to financial literacy because interestingly, what we found is that in fact in many countries, we find that often half of the population knows the correct answer to these three questions. So it's not just the U.S., but in many other countries, as well, the level of financial knowledge should not be taken for granted.
Interestingly, it's the countries with very strong education systems that tend to do better. So, for example, Canada, or Germany, or some of the Nordic countries -- we just did a survey in Finland -- tend to do a little bit better. But again, I think, you know, when you look at the proportion of the population that answer these three questions, which are relatively easy, it's not even in these countries a very high proportion.
Another thing that I want to mention -- and I say this all the time -- I mean, it's interesting that it's not the countries with the most developed financial markets that tend to do better. In other words, it's not that we acquire financial literacy by breathing the air or watching the world around us. Some of these things are pretty complex, you know.
Are you really going to learn about risk diversification, in a sense, by your experience, or by reading about the stock market? I mean, some concepts are, indeed, complex and that's why when we think about how can we improve financial literacy, I think, you know, we should not just leave it to the individual to learn, because it seems that the process is very long.
And we have observed, for example, in Germany, where we could actually measure financial literacy in what was considered East Germany versus West Germany. Twenty-five years after the unification, people who live in what was East Germany are much less financially literate. So it takes a long time.
Gardner: Well, the natural next question is, what can we do? What can you do? Well, you in your position can do a lot more than most of the rest of us. But what can any of us do to improve financial literacy?
Lusardi: I want to answer this question by also having looked at the experience of these countries, as well, and we have actually learned a lot which is that, you know, interestingly all of the groups which have low financial literacy are similar in these countries. And these groups, interestingly, for example, are disproportionately the young, the old, and women -- something I want to come back to later on.
Lusardi: And this actually brings the fact that, you know, when it comes to financial literacy, I think it's really important that we start with financial literacy in school. And the reason is financial literacy, today, is an essential skill to participate to society. You know, we start making financial decisions very early on. In fact, one of the most important decisions we make is in high school, when we decide whether or not to go to college and how to pay for that education.
And we make, now, financial decisions all the time. So in the same way in which, I think, reading and writing was needed to participate to a more complex society like the industrialized society; today, in the 21st century, we need financial literacy, as well.
Gardner: Now, does some of your work look at individual ... just sticking with the United States, here ... individual states or regions? Are there certain states that are getting it really right here in the U.S.?
Lusardi: Yeah, that's a great question. So several states are requiring financial literacy, and perhaps what is surprising is that it's only not even the majority that are doing so. So you know, a lot of states still do not require either economics or personal finance in high school; yet, you know, the student loan [debt] is at $1.3 trillion, right? So let's think of that.
But also interestingly, when we look at the states, I think there are a lot of differences in how personal finance is required, right? Sometime it's just a requirement to pass a test.
Gardner: Check a box...
Gardner: ... get it done.
Lusardi: ... exactly, which is, you know, the course is not required, and there is not even training of the teachers. And, in fact, until recently, there is not even a curriculum for what should be in a personal finance course.
So what we have really learned -- and believe me, I don't think we needed a scientific study to prove that -- but we have proven the obvious, which is it is the state that requires a course that trains the teachers and that have a rigorous curriculum that actually find that financial literacy not only helps young people deal with that, but it's also quite effective.
Gardner: Boy, does that sound very likely to me. Now, Dr. Lusardi, can you give a name of one or two U.S. states that you think do this particularly well? Do you have examples? Who's the exemplar?
Lusardi: So for example I think, you know, there are three states that were indicated in the study, and one that I remember was, for example, Texas. And what they did is they compared Texas with a close-by state that didn't have, in a sense, this type of requirement. Didn't have a good curriculum.
Gardner: So the states bordering Texas. Texas does this all the time, by the way. I mean, it's a big state and they, you know ... sometimes they look at us and say "big hat, no cattle" ... so they're comparing themselves to their neighbors and saying we're doing better.
Lusardi: And they are doing better, so, you know... And I think overall I would say, you know, the states that now pay more attention, for example, to training the teachers, and that have adopted this national standard for financial literacy I think are, you know, making improvement.
Gardner: Now I'm hearing you say things like adopting a standard for financial literacy. You also mentioned until recently there hasn't been a curriculum. Could you mention what is a standard, and what is some new curriculum?
Lusardi: So we actually thought about this a few years ago, when the Council for Economic Education asked us. They put together a group of experts to think about national standards for financial literacy. I think, you know, they existed, before, but finally we had something in writing ... like a group of people put together to do so. And so, you know, we then designed what were the list of topics that belong to that curriculum.
And by the way, we do this for every other topic. Like if you study modern history, you're not going to study the Egyptians, right? So, you know, we need to do the same for personal finance and really indicate what are these topics. And also, you know, I think one of the issues that has held back this topic is this idea that personal finance is not rocket science.
And I actually think it's both, David. It's science, for sure, in the sense that what we teach is a lot of these mathematics behind financial decisions, right? For example, interest compounding. You know, we explain all this, which actually comes from probabilities. And we explain, you know, variances, and we explain dispersion. And we explain that to make financial decision, you have to do calculations. And so there is a lot, in fact, of science in that financial literacy.
Gardner: I mean, your three questions, looked at from another angle, are math questions...
Lusardi: They are math questions.
Gardner: ... at least two of them just basic math.
Lusardi: Right, and the third is statistics, you know. So they are science, but they are also a rocket, a rocket that will fall on our head if we don't address this financial illiteracy and particularly among the young.
Gardner: And let's close there with my final question, which is what can we do for our young? What have you done for the young people in your life? What do you do for students? What can I do as a parent or a citizen of my community?
Lusardi: That's a great question. So because we are a global center, we started local, and the first initiative that I have done when I started the Global Financial Literacy Excellence Center, or GFLEC, at George Washington University ... we started a personal finance course for, actually, college students. In the same way in which we teach finance, corporate finance to the MBAs, we can teach personal finance.
Because today, we are going to be our own CFO. We are going to manage quite a bit of our wealth over a lifetime, and it's our responsibility to do so. And I don't miss any opportunity to try to help, or try to push these courses in other colleges, in other universities, in other places. But again, I think we need to start much earlier. We need to start in high school and, in fact, even before that.
When people ask me when is it you have to start teaching personal finance, I say, "When the tooth fairy arrives..."
Lusardi: And that's a good time to talk about money, given that, you know, the tooth fairy will bring you something.
Gardner: Yes. You sure hope so, anyway. As a parent, I occasionally forgot my role until the morning, where you try to be very, very subtle with your child. But I agree that that's a great [idea] ... and that means it's an early date. An early date.
Lusardi: Exactly. And I think there is an important role for parents, grandparents, the community, to improve financial literacy and support financial literacy. One of our recommendations is be an ambassador for financial literacy. For example, ask it in your school. Ask it in your library. This is sometimes what it takes to have a new financial literacy. And ask the business community, for example, to just teaching for training the teacher, or to maybe buy the textbook. We can all contribute to that.
But also, talk to your kids about money. It's a very important topic today, and I think these early habits start very early, and that's why I think, you know, we need to think of this topic really early on and it needs to be part of our conversation. We live in the 21st century and money is part of the 21st century.
You know, my big advice to the young people is really invest in themselves. Invest in their knowledge. You know, the knowledge is about the future, and financially to see what it is, in essence, is a vision about the future. And I tell them it's a happiness project, but happiness doesn't happen in the short run. It happens in the long run. And so to pursue your happiness, you have to look at the long run. You have to have a vision for your future, and that's why you need to be financially literate.
Gardner: Well, you're certainly preaching to the choir, not just here in this studio but to many who are hearing you this week. Dr. Lusardi, thank you very much for your work. One of the nation's foremost experts on financial literacy. Honored to have you [on] this week's Rule Breaker Investing podcast. Thank you.
Lusardi: Thank you very much. It was a pleasure to be here.