On this week's Rule Breaker Investing podcast, Motley Fool co-founder David Gardner's guest is Dr. Annamaria Lusardi, the Denit Trust Chair of Economics and Accountancy at the George Washington University School of Business, as well as the founder and academic director of GW's Global Financial Literacy Excellence Center. A well-regarded expert in her field, Dr. Lusardi is best known for a piece of research involving a three-question financial literacy quiz.
One hopes that every regular visitor to The Motley Fool would ace this test, but in this case, we're more interested in what each question measures and what getting it wrong signifies about a person's financial know-how. Question 1 is particularly interesting, because if you're knowledgeable, you might just think they're asking it wrong. But just wait and see...
A transcript follows the video.
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This podcast was recorded on Oct. 5, 2016.
David Gardner: Dr. Lusardi, I want to go over, one at a time, each of the three questions, and if I'm listening, which a lot of people are, I want, as a listener, to be guessing what is the correct answer. We're going to go over the three questions. Is this OK with you?
Annamaria Lusardi: Absolutely.
Gardner: Excellent. And then we're going to ask you, as you jog or drive the kids around, right now, what is your answer, and then we're going to talk about the correct answer and go from there.
Gardner: So let's start with question No. 1. I'll read it. Then I'll read the answers. We'll pause briefly so each person can kind of think, and then you'll give the correct answer and what we should know, or why you ask that question in the first place.
So here's the first question: Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow? There are three choices (a) more than $102 (b) exactly $102 or (c) less than $102 ... (a) more (b) same (c) less.
All right, we are all coming up with our answer. Dr. Lusardi, what is the correct answer to question number one?
Lusardi: Well, the correct answer is more than $102, and as you can imagine, you know, probably a good percentage of people have gotten this question correctly, because we meant to have a relatively easy question here. This is a question measuring the capacity to do a calculation in the context of interest rate, and we have to do this calculation, you know, very often when we make financial decisions.
You know, we could have made this question more complicated, and ask if people know about interest compounding; but, in fact, even this basic knowledge we found is really important to understand how, you know, comfortable and how confident and how knowledgeable are people in making these very simple financial decisions.
I also want to add one more thing, which is that, you know, normally when people look at these questions, they don't put what we actually did put in the list of answers to these questions and which are important for where you do surveys; formal surveys. So there are two more options as answers, which is "I do not know" and "I don't want to answer." And so it's important to add those options, because I think it's important for people to say "I do not know." And if you don't know, I prefer you to say that than kind of to guess. And also, you know, you can refuse to answer if you don't want or don't like this question.
It turns out that these two options are pretty important because, you know, there is something I want to say later on about this "do not know" and actually talk about that; not just in the context of Italy ... of that that you ask in Italy ... but in the context of many other countries, as well.
Gardner: Now Dr. Lusardi has asked this question of many people in many different languages and cultures, and once we get through all three, I would love for you to share some insights about the U.S. versus others. Who's the best? Who's the worst? Those kinds of things.
I will steal a little bit of the fire ahead of time -- and I know some of our dyed-in-the-wool Motley Fool listeners already know this -- but your studies I believe show that the majority ... I'll just go here with U.S. ... the majority of U.S. adults do not get a perfect score on this three-question quiz.
Lusardi: No, not at all. In fact, less than half of the population get these questions correctly. In fact, when we did this earlier on, it was only one-third of the population who gets these three questions correctly. So in other words, we cannot take financial literacy as granted.
Gardner: Indeed. OK. So that was question No. 1, and before we move to question No. 2, ... Dr. Lusardi, roughly in the U.S. -- roughly -- how many people would get that one right? If I just got it right here on my jog, should I be patting myself on the back?
Lusardi: Yeah, this one I think you should. You know, this was supposed to be an easy question. It's supposed to measure, you know, do you remember these simple calculations. But also, again, it's in the context of interest rate. So, you know, overall, in the latest survey, I think 75% got this question correctly, so it's not supposed to be a really challenging question. It's really just supposed to measure basic numeracy.