14 April 2008

surrounded by idiots

http://blogs.wsj.com/economics/2008/04/09/bernanke-backs-financial-literacy-take-the-quiz/?mod=WSJBlog

Fed Chairman came out with yet more disturbing statistics.. principally that roughly 53% of these questions can not be answered correctly by high school seniors. I'll grant that high school seniors probably don't have a great deal of fiscal experience with loans and so forth. But it would be best that they at least are aware of what that experience should look like so they aren't taken advantage of by the financial industry. The financial industry itself is not automatically evil, but it is designed to make money from yours. So it might be best to understand how to use it to make your own money work more efficiently without first getting screwed in the process.

Of the questions themselves I only have two beefs.
"If you went to college and earned a four-year degree, how much more money could you expect to earn than if you only had a high school diploma?"
The answer to this question is actually not valuable, despite its frequent quotation in both high school courses and colleges. The difference in economic impact of a degree actually varies depending on what the degree is in and, more importantly, who received a degree. Logically speaking people who are motivated to receive educational advantages provided by colleges are likely to have some levels of success in other endeavours anyway owing to a strong motivation or other basic skills that allow them to successfully complete college coursework. For example, many people who go to college are likely to go there because it would provide access to better careers, but are succeeding at college and going because of other factors such as personal motivations and intellect, which have intrinsic economic value of their own and cannot easily be separated from the bland statement of how much "a college degree" adds. In any case, the answer is 70%, which isn't quite what I'd say it adds, but is the statistical answer. There are plenty of people who forego college educations because of business opportunities that offer considerable personal advantages well in excess of this 70% figure (professional athletes, artists, or entrepreneurs). Many of these people fail anyway, but of those that do succeed, it could be said that if they possessed the drive and skill to finish a college course instead, they would have done so (possibly diminishing their lifetime accumulation of wealth to do it). It does add some median value to an individual, but it's difficult to say that that value even approaches 70%.

College is merely a paying experience for training and honing of skills that may or may not be useful in later job experiences. Ideally it is the development of critical thinking skills and other processes that are not fully investigated by primary education, the expansion of broad bases of knowledge into more specific and specialized areas that one is both interested in and skilled at developing working knowledge out of. But this is merely an idealized way of saying college is usually a degree market for more and more people.

The second question I would wonder about, though it's obvious what the question wants as the answer, is the life insurance one. Nobody 'needs' life insurance, even people with children. It isn't required by law as car insurance or even health insurance is in some places. Life insurance is actually a want, a provision for survivors (and if it's setup right, a provision for yourself as well). I'd argue that technically the person with the greatest 'need' is the old couple because they're more likely to die, and as a result they're more likely to pay through the nose for it (if they haven't already paid for it that is). People tend to want life insurance when they start families, but conversely we're taught to get rid of it (by the insurance companies) when we're about to make use of it, when we might actually 'need' it. Weird huh?


As for the actual responses.
1) Only 40% got this right. FIXED income is right in the answer. ..the most common response was actually the couple with children. But as that case makes no assertions about the couple's income or the variability of it.. even common sense process of elimination should say that there's something different about the right answer.
2) 42% got this right. Roughly 50% somehow bought the first two (that we have a national sales tax and that it's removed from our pay).
3) Hooray 88% know to put money in banks
4) Only 36% got this right. I can forgive the low total I suppose, but again what's different about the right answer: FIXED is right in the answer.
5) 56% got this one right. Perversely the next most common answer is the one that is MOST wrong -- the last one. Technically the middle two are stupid too, but people do need clothes (on sale) or vacations. Taking out loans when they are exceeded by gains in other areas isn't always wise either, but at least it nets some growth.
6) 48%.. I suppose another 33% at least knew they could get the report if they're turned down. I'm amazed at the 14% who think credit reports are run by the federal government.
7) 56% . That sales tax thing is really throwing some people.
8) 36% .. Apparently I need to explain what a 401k is again (37%). And I wish the 23% who said SS were right..
9) 40%. 32% said stocks, but stocks are at least liquid and can be cashed in immediately if need be. Home equity requires loan qualifications and lots of questions asked by the bank issuing the loan, generally a pain in the ass.
10) Hooray 60% of people can do word problems.
11) Apparently people are terrified of stocks: only 17%?!! A savings account at 41%!!! Other than online banks offering 4% or so, you're getting almost nothing in a savings account. In theory there are series I US savings bonds that do get very good rates of return because they're indexed to inflation but you can't buy them anymore because it was only in the initial run that they offered tremendous fixed rates in addition to inflation adjustments. No wonder people complain about the 'growing gap between rich and poor'. Only rich people are putting money places where it will grow apparently.
12) 46% .. I can sort of forgive the 33% who think their parents will have to co-sign because they've probably had parents paying the bill the whole time on their own cards. They're still wrong of course.
13) 47% This one is sort of tricky because people seem to assume that taxes go down as you get more money because the politicians always say the evil rich aren't getting taxed. As a result plenty of people assumed it would go up 'a little'. The 15k figure is important because that's the first tax line for AGI brackets, they could have gotten much more confusing had they used larger numbers.
14) 75%. At least they know what a job is.
15) 71% I'm actually surprised this is so high. Maybe all those spam ads for credit elimination on the radio don't work. I am confused as to how the federal government is diverting income tax revenue to pay off your credit cards as the second answer.
16) 51%. I think the question should have explained briefly that they were putting the money somewhere generating interest. But at least most kids figured that assumption out.
17) 40%. Health insurance is a confusing business for most to figure out, including economists. But I'm fairly sure they don't cover children once adults unless it's specified on the policy to do so.
18) 68%. There's some assumptions involved here, like whether or not Don's friends are co-workers/bosses. But even so, it's true that improving your skill set makes you inherently valuable.. whether a company recognizes this with increasing wages is another assumption but a safe one.
19) 13%. Many credit cards do offer fraud protections that do not require the card holder to pay anything. That's not required but it's a competitive feature, somehow people mistook this for federal legal requirements in overwhelming numbers. The correct answer here was actually the least common response.
20) 68%. At least people know what fees are
21) 57% I'm surprised this number is so high when many people seem to respond so well to messages to tax corporations and 'rich' people (usually small business owners).
22) 37%. Most forms of insurance don't do a good job of explanations. Liability is usually what is legally required, but it doesn't cover you at all, not even if you or your passengers go to the hospital. I would have hoped enough people would know what liability means, but obviously the vocabulary deficiency isn't helping.
23) 43% . Collateral for loans is a big deal. I would have to wonder why people don't understand why their credit card interest is so much higher than car or home loans. It's possible to get other loans with favorable terms with other "fixed" assets as collateral as well.
24) 48%. What with all the harping teachers do on this figure, I'd have expected a higher number. Obviously not everyone is paying attention. (22% said 10 times as much.. they may be in for a considerable disappointment).
25) 28%. Everything else says US or is insured by the FDIC regulation (bank). State offer their own regulations but they're not federal.
26) 51%. 32% seem to have 'agreed' with me that old people 'need' it more. But it's obvious the question refers to the potential for economic catastrophe that insurance protects against (in this case the children's futures).
27) 82% know how to spend money
28) 48% This one was perhaps the most disappointing. It shows a complete lack of understand of what corrosive effects credit card interest has to create great financial harm.
29) 54% Credit history is universal, much like medical history is becoming. But apparently people still assume we live in the stone age where businesses don't talk to one another to reduce their risks
30) 33%. Again people don't understand collateral -- 29% said getting an additional mortgage wouldn't help. It doesn't say what the dumbest thing to do is, it just asks what won't reduce the rate.
31) 27%. Again 40% of people will be sorely disappointed when they discover their savings accounts are open to taxation. There are ways to save money without taxes true, even inside a savings account. But a plain old savings account is regular income and isn't the best way to grow money beyond a certain point (besides which it probably isn't growing anyway with the puny rates of interest)

The study then asked classification questions. There wasn't a huge gap between men and women (men did do slightly better). Families who owned homes did slightly better than renting families. People planning to go to on to BA/BS degrees did a bit better than their contemparies (which doesn't necessarily mean they know more about money but that they're probably better at figuring out questions). Naturally as one's parents made more money or had higher education, one's score improved. 'Whites' scored better than other racial groups. Asians made up a fairly small sample, so I would take the slightly lower score there with a grain of salt. The explanation of money to one's children has a significant impact, but it does require that one understand how to use it effectively in order to do so.
The more interesting nuggets. Kids who didn't use credit cards at all scored higher than those that did, but having no bank account to speak of was a serious blow. Kids who had had any job at all scored slightly higher (probably because they know how to look at a paycheck), but not decisively so. Having had a course with a stock market game seems to have helped. Not taking any college entrance tests (ACT/SAT, etc) seems to be a bad indication as well.

I take it they redid the SAT scoring recently (so I've learned from wiki). The 'over 2000' threw me for a bit. 1480s apparently aren't what they used to be.. Although those section averages are pitiful. 518? 503? 497? For all the focus on math scores being so low, those reading/writing ones are even lower.

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