Three Questions to Measure Financial Literacy

Lusardi and Mitchell (2008, 2011a, 2011b) have developed three questions to measure knowledge of financial education, following the criteria of:

• simplicity
• relevance in daily decisions
• brevity
• capacity to differentiate between subjects.

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

   A) more than $102

   B) exactly $102

   C) less than $102

   D) do not know; refuse to answer

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, with the money in the account would you be able to buy:

   A) more than before

   B) exactly the same as before

   C) less than before

   D) do not know; refuse to answer.

3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”:

   A) true

   B) false

   C) do not know; refuse to answer.

In the original application to people over 50 in the United States, the correct answers to the three questions were 67%, 75% and 52% respectively. Only one in three people answered all three questions correctly.

In their survey, Lusardi and Mitchell (2014) recall that numerous other tests have been developed, also in measuring financial sophistication, revealing for example that only 21% know the inverse relationship between interest rates and bond prices. Furthermore, the application of the three original questions to an international context demonstrates that the US findings also extend to other countries. For example, in Italy the correct answers to the three questions are 40%, 59% and 52% respectively. Only 25% answered all three questions correctly.

There are differences: young people and women were less knowledgeable (more women answered "do not know").