Finance Basics Elude Citizens

Americans are “financially illiterate”—a condition linked to debt and unnecessary spending, according to a new study by Peter Tufano ’79, a professor of financial management at the Business School, and Annamaria Lusardi, an economics professor at Dartmouth College.

The survey, conducted by the global market research firm TNS, asked 1,000 Americans about credit card debt. Over 64 percent of respondents could not correctly estimate how their interest would compound over time. The majority of people also said they did not understand minimum payments, and few could determine the different financial consequences between paying monthly installments or a lump sum. The results also revealed that one in four of those surveyed said they had too much debt.

“This is a result that over and over surprises me,” said Lusardi, one of the nation’s leading experts on financial literacy. “We have to basically recognize that financial knowledge is very limited.”

Tulfano said that those who were less knowledgeable about finance were also those who use high-cost financial products, such as programs that promise to reduce and manage debt.

Lusardi said that people are “bombarded” by such products, which often fail to provide the promised help and simply add to one’s costs.

Both professors said they are taking immediate steps to improve financial awareness.

Tufano has started Doorways to Dreams, a non-for-profit that creates video games to educate youths about financial concepts. Lusardi plans to teach a class on basic economics and finance as part of a new Dartmouth financial literacy initiative.

Both researchers are also currently working on a paper to expand on their findings in this study.

“We want to raise awareness about this topic,” Lusardi said. “The economic profession doesn’t really realize how important this topic is becoming.”

The obligation on educators, financial institutions, and consumers to promote better knowledge is “incumbent.”

Financial literacy is critical because it is both a “political” and a “generational” issue, Tufano said.

“I don’t care if you’re a bad driver if you don’t go on the road but people who are least comfortable about their driving skills related to these findings, they are on the road,” Tufano said. “They’re uncomfortable. They feel out of control, thinking, ‘I have too much debt.’ And they’re actually driving pretty fast.”