In our new research study which interviewed participants across 10 European countries, our team working with Annamaria Lusardi has demonstrated that financial and risk literacy leads to better choices when it comes to making decisions and identifying the right paths to our financial goals. We also show that the impact of financial and risk literacy on decision-making goes above and beyond that of education. And as in Olivia S. Mitchell’s recent findings, we confirm that women and millennials are least informed when it comes to financial and risk literacy.
To dig deeper into this topic, we have fielded some of the richest surveys on financial and risk literacy in the western world. The study covered 10 European countries and 10,000 respondents (1,000 per country). We posed the “Big Three” questions widely used in prior financial literacy research, regarding compound interest, inflation, and diversification. To these we appended questions on risk concepts designed by Annamaria Lusardi and Peter Tufano.
Our results confirm that people are still struggling with the basics. Across all countries, 76% understand how interest rates work, and only 63% understand inflation. This is similar to survey findings in the US: 75% get the interest rate question right, and 59% understand inflation. These are sobering results. Financial understanding is also particularly poor when it comes to risk questions. In particular, only 15% understand the relationship between risk and return.