Dr. Terence Smith, Deputy Governor, Bank of Guyana
The importance of being numeracy literate
Research findings from both the United States and other countries with regard to the level of
numeracy in the adult population indicate alarming results that are “very low and particularly severe among some already vulnerable groups in the population, such as the elderly, women and those with low educational attainment.” According to George Washington University, this is “problematic because numeracy has been found to be linked to financial decision-making, and many governments and employers around the world are increasingly shifting the responsibility of saving, investing and borrowing onto individuals.”
In Part 1 of this article, it was noted that the world requires us all to have a high level of competence in basic numeracy skills, because financially capable people are able to make informed decisions. In fact, a “lack of financial understanding can have long lasting, severe economic repercussions.” For the numerically illiterate, numbers can deceive in both small and large financial decisions. For example, the following question was asked with respect to numeracy, “Does 0% financing save you money on a car?” The answer to this question is not obvious because there is both a benefit and a cost associated with each choice. You have to do the math to find the choice that is right for you.
The research literature has documented numerous data sets from the United States and other countries about numeracy and financial decisions. For example, the 2004 U.S. Health and Retirement Study, a survey that covers people 50 and older, contained questions measuring numeracy. Respondents 51-56 years old were asked the following question:
· “Let’s say you have 200 dollars in a savings account. The account earns 10% interest per year. How much would you have in the account at the end of two years?”
This compound interest question was difficult for most of the respondents; only 18% correctly computed the compound interest. Of those who got the question wrong, 43% erred by undertaking a simple interest calculation, thereby ignoring the interest accruing on both principal and interest.
In a paper written by Annamaria Lusardi, another study, the English Longitudinal Study on Aging (ELSA) related to numeracy asked the following two questions:
· “In a sale, a shop is selling all items at half price. Before the sale, the sofa costs $300. How much will it cost on the sale?”
· “A second hand car dealer is selling a car for $6000. This is two-thirds of what is cost new. How much did the car cost new?”
Again, respondents show a low level of numeracy, between 11-12%. The question on compounding is the one that respondents found more challenging. Lusardi considers these dismal findings, considering the complexities of the calculations involved in many financial decisions.
Everyone makes decisions in the marketplace and most of these decisions require comparing numbers. Too often consumers make poor decisions because they fail to understand the context of financial numbers. According to Joseph Ganem, Ph.D, “A large part of this problem arises because our schools fail in teaching students, quantitative literacy, which is educational jargon for facility with numbers and arithmetic.” Quantitative literacy is the most important of all mathematical skills because it is the one area of math that affects all our lives each and every day.
Financial illiteracy and lack of numeracy are not only widespread in the population but are particularly severe in certain demographic groups. According to the literature, there is evidence from research in psychology, marketing, and medicine that people are not numerate and have difficulty performing calculations that involve percentages.
A California study of a group of 201 individuals aged over 61 years examined the role of numeracy, or comfort with numbers as a potential risk factor for financial elder exploitation and found that there is a significant risk factor for the exploitation of the elderly because of weaknesses in mathematical skills. Numeracy skills can be useful not only in the job market but also in making good financial decisions throughout one’s lifetime.
Justification for teaching financial literacy and numeracy
Given the complex menu of financial products and increased focus on individual responsibility, it is essential that we take steps to ensure sound financial decision-making, improve the rate of financial market participation, and lessen risk aversion. From an early age, students need to understand finance. Dr. Ganem suggests that financial literacy should be integrated into the current math curriculum rather than taught separately. Such an approach would have the added benefit of showing students that math is relevant, because knowledge of math leads to personal financial gain.
The earlier that young people can develop basic financial skills, the more likely it is that they will make good financial decisions when they become adults. According to the research literature, “there is an undisputed link between the need for adequate basic skills in numeracy and literacy and financial literacy.” As the world advances, we have to understand complex information presented in financial charts, deal with percentages and solve time management problems.
A lack of financial understanding can have long lasting, severe economic repercussions. Therefore, high schools and colleges should consider integrating financial topics into the current curriculum.
It must be noted that people of all ages must be capable of making effective decisions. Informed and educated consumers not only achieve better outcomes for themselves but, through shopping for and use of financial products, help to increase market efficiency and innovation.
Next week we will examine tips to choosing a financial literacy curriculum. Thanks for all your comments and support. As usual, please send your comments or questions to [email protected]
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