According to a recent n=150,000 global survey by Gallup and S&P, there is an astounding lack of financial literacy in the world.
To gauge financial literacy, they asked a series of four questions on basic financial concepts such as risk diversification, inflation, simple interest, and compound interest. They were very simple and typically only had 2-3 possible answers. Here is the most “difficult” question:
Suppose you had 100 US 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?
The possible answers were:
[more than 150 dollars; exactly 150 dollars; less than 150 dollars; don’t know;
refused to answer]
Demonstrating understanding in three out of the four areas qualified you as financially literate. Only a third of the world’s population reached that threshold, rising to a modest 53% in the advanced OECD countries.
One surprising pattern is that there was very little variation in financial literacy between low-income and middle-income countries; there was only a sustained increase once countries began to exceed the $12,000 GDP per capita mark. Presumably, that is approximately the point when people start doing things like getting credit cards and taking out mortgages, so they are forced to come to grips with concepts like compound interest whether they like it or not. But there are plenty of both negative outliers (e.g. Japan, Korea, Italy, Portugal), as well as a few positive ones (e.g. Bhutan, Myanmar, Botswana).
Curiously, the correlation between financial literacy and cognitive ability appears to be surprisingly low. In other words, basic financial literacy has a low g loading.
There is a relationship to be sure, but exceptions abound, even in the rich country list. High IQ Japan, Korea, and China do a lot worse than one might expect. Botswana and South Africa do much better than what their national IQ levels might imply; in fact, South Africa is the highest-scoring of the BRICS countries.
Although conventional coverage of the national differences in financial literacy highlighted in this report by mainstream journalists like Leonid Bershidsky predictably focus on things like education levels and exposure to financial services, the really big explanatatory factor seems to be religious/cultural.
On the global scale, the Protestant world comprise nine of the world’s top 10 most financially literate countries, and an amazing 17 of the world’s top 25 – which is also a convenient threshold representing 50%+ financial literacy. (By which point the stock of both developed world Protestant countries pretty much ends). The world’s offshore bank, Switzerland, is a relatively disappointing 15th.
9 of the top 10 countries are within the Hajnal line of Europe, or are their descendants; and 17 of the top 25.
Predictably, the non-Protestant exception in the top 10 is Israel. The Jews can sure count their shekels.
Another correlation that seems to exist is with time preference. Countries where people displayed a willingness to wait to get a greater sum of money in one month’s time, as opposed to getting a smaller sum right now (inflation-adjusted), also tended to perform much better on financial literacy metrics.
The Catholics and Orthodox Christians tended to do a lot worse, even though as we know IQ differences between them and the Protestant world are fairly minor. Likewise with the Confucian civilization.
This suggests that Protestant populations have tended to culturally evolve (or gene-culturally evolve) an “intuitive” understanding of finance like things, while the rest of the world pretty much has to figure it out from zero. More intelligent populations with financial experience, such as the Japanese, tend to be relatively better at it (43% financially literate); less intelligent populations without much financial experience, such as the Indians and Iranians, do much worse at it (<25% financially literate).
Still, there remain some curious cases nonetheless. How does dirt poor and only 60% literate Bhutan manage to take 20th place, with 54% financial literacy? Myanmar also does surprisingly well for a country of its socio-economic and hisorical profile, taking up the 24th slot. Both are Buddhist, but otherwise, Buddhists do not appear to perform especially well; Cambodia is one of the worst, while Thailand is middling between Myanmar and Cambodia. Nor does it appear to have anything to do with the particular sect of Buddhism: Bhutan follows Vajrayana Buddhism, while Myanmar follows Theravada.
Financial Literacy 2015 via S&P/Gallup
|#||Country||% Financial Literacy|
|39||Hong Kong SAR, China||42.7%|
|54||United Arab Emirates||38.3%|
|88||Congo, Dem. Rep.||31.9%|
|101||Egypt, Arab Rep.||27.5%|
|104||Bosnia and Herzegovina||27.2%|
|116||West Bank and Gaza||24.6%|
|130||Iran, Islamic Rep.||20.5%|