In a massive global undertaking, the World Bank and McGraw-Hill commissioned Gallup to interview more than 150,000 nationally representative and randomly selected adults in more than 140 economies around the world last year. The goal: “to understand the extent of people’s understanding of basic financial concepts as well as the degree to which financial skills fall short among groups like women and the poor,” and to be “the first and most comprehensive global gauge of financial literacy to date.”
Given all the money and effort which went into this project—which involved asking all those 150,000 adults the same five questions—you would think the five questions would have been very carefully constructed, so as to be relevant to all types of people, with all types of formal education, in all types of countries.
Instead, however, they decided to ask questions like this:
Suppose you had 100 dollars in a savings account and the bank adds 10 percent per year to the account. How much money would you have in the account after five years if you did not remove any money from the account: more than 150 dollars, exactly 150 dollars, or less than 150 dollars?
This is completely bonkers: Nothing useful can be learned by going up to poor workers in, say, Afghanistan (to take the very first country on the list), and asking them this question. They don’t have banks, and if they do have banks they don’t have savings accounts, and if they do have savings accounts they don’t hold on to them for five years, and if they do hold on to them for five years they’ll probably end up with nothing at all, since the bank will probably have been looted, or gone bust, or else they will have no way of proving their ownership of the account. On top of that, there’s no reason to believe that they have any idea what “10 percent” means, because that’s a mathematical concept they are very unlikely to have been taught at school.
Afghans, like everybody else, can be very smart and shrewd about their finances, and, like everybody else, sometimes they can be stupid too. But if they’re smart, and they’re faced with a question like this one, the only sensible response is some kind of WTF eyeroll.
Essentially, what the World Bank and McGraw-Hill did here was to attempt to recreate some kind of sepia-toned 1960s perfect world, where banks are perfectly trustworthy, where people have savings accounts that pay double-digit interest rates and don’t charge any fees, where there are nice stable things called dollars that can earn interest over time, and where individuals happily save money for years on end for some undetermined rainy day.
This world does not exist. It probably never existed. But it certainly doesn’t exist in countries like Afghanistan, and, more to the point, people in Afghanistan didn’t grow up watching It’s a Wonderful Life and dreaming that this world might conceivably exist.
Unless you’re in the top 1% or so of global wealth, you’re not the kind of person who’s going to worry too much about interest in savings accounts. You care deeply about finances, but you care mostly about practical issues: when can you get paid? How will you be paid? How can you pay for the goods and services you need?
And yet, here’s the first question from the World Bank (an institution whose primary mission is fighting poverty) and McGraw-Hill:
Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?
For 99% of people on the planet, there is a long, long list of things you might do if you “have some money.” Probably you would want to pay down your debts. Give some money to your parents, or your children, or some other family member in need. Buy a stove, or a roof, or a car, or an education. Make your life better. Investing in multiple businesses isn’t even on the long list, and neither should it be: passive equity investment just doesn’t provide the kind of liquidity and risk profile that most people need. (Putting your money into one business, on the other hand, can make sense, if it’s your own business, but that’s marked in this quiz as the Wrong Answer.)
All of the questions are like this: utterly irrelevant to the lives of the people they were put to. The second question is about the prices of “the things you buy” in 10 years time, as though that’s a useful time horizon for anybody but the most privileged. The third is another question about interest rates expressed as a percentage, but this time with no annualization, which is itself confusing. The fourth is about a bank which “agrees to add 15 percent per year to your account.” (Nice bank!)
Then, when global citizens, understandably and predictably enough, fail to answer in the same way as a rich westerner would, the resulting report starts tut-tutting:
Without an understanding of basic financial concepts, people are not well equipped to make decisions related to financial management. People who are financially literate have the ability to make informed financial choices regarding saving, investing, borrowing, and more…
33 percent of adults worldwide are financially literate. This means that around 3.5 billion adults globally, most of them in developing economies, lack an understanding of basic financial concepts…
Billions of people are unprepared to deal with rapid changes in the nancial landscape… Governments are pushing to increase financial inclusion by boosting access to bank accounts and other financial services but, unless people have the necessary financial skills, these opportunities can easily lead to high debt, mortgage defaults, or insolvency.
This is all very silly, and unnecessarily alarmist. Financial inclusion is good! So is consumer protection! But financial literacy is something which comes after you have access to financial products, not before. And the place you want it is in the office of the financial regulator, rather than broadly distributed in the population as a whole. As Lauren Willis says, “the pursuit of financial literacy poses costs that almost certainly swamp any benefits.” So let’s stop asking people questions about interest rates and percentages, and then pretending to be shocked when they don’t give us the answer we’re looking for. In reality, those results aren’t shocking at all, and there are much higher priorities for the likes of the World Bank to be concentrating on.