Most Have Poor Grasp of Economics

We previously looked at the question of Why You Suck at Investing. Our concerns were of  physiological and emotional aspects, rather than purely knowldge based.

But it turns out thats a problem also:  A Harris
Interactive survey suggested that the typical American
does not know enough about economics to prosper in a self directed retirement system.

The public’s understanding of economics is bad — even worse than the economists’ understanding of economics: 

• fewer than 40 percent of American adults have ever
tried to live on a budget;
• large numbers of Americans
cannot tell the difference between a stock and a bond;
• only 18 percent of Americans know at what
age they will be eligible to retire with full benefits;
• half of American adults did not
know that if they kept cash, they were at greater risk
of losing ground to inflation than if they invested it elsewhere.

Here’s an excerpt from the NYT:

"Given recent signs that inflation might be increasing, this [survey] is quite a
frightening finding," said Alan B. Krueger, an economics professor at Princeton
University who served as chief economist for the National Council on Economic
Education, a business group that commissioned the survey.

The survey of 3,512 adults and 2,242 high school students also suggested that
the intense attention Americans have paid to the pronouncements of the Federal
Reserve chairman, Alan Greenspan, in the last few years had done little to help
people grasp the role of interest rates. One-third of adults were unable to
explain how falling interest rates would affect business.

Other analysts said they thought that the findings added to a growing body of
evidence that the typical American is poorly equipped to take advantage of what
proponents call the ownership society: a future in which individuals are free to
invest their own retirement money, rather than having to accept the returns
offered by the Social Security program or a group retirement program at work,
like a pension plan. Many surveys have shown the public has doubts about the
Social Security program, with young people, in particular, confident that they
could do better by investing on their own.

Ahh, the classic investor foible of over-confidence. There have been far too many studies to waste much time on  this, other than to once again, direct your attention to Thomas Gilovich’s "How We Know What Isn’t So."

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Source:
Survey Finds Many Have Poor Grasp of Basic Economics
By MARY WILLIAMS WALSH
April 27, 2005
http://www.nytimes.com/2005/04/27/business/27survey.html