Europeans and financial literacy: when will the penny drop?

Financial and risk literacy are essential life skills, but a new survey reveals many Europeans still lack basic knowledge

Everyone, every day, makes important financial decisions. Whether you are a CEO negotiating a multi-billion-euro deal, a young couple about to take out a housing loan or a student calculating the best value to be had for your lunch money, daily financial decisions are a given.

Deregulation, globalization and demographic change mean individuals today face a stunning array of financial choices, including on such complex issues as health and retirement. How able each person is to deal with these will have an important bearing on the financial wellbeing they will experience throughout life.

Many Europeans are poorly skilled when it comes to even basic financial literacy concepts, according to a recent survey spanning ten western European countries. Conducted by Allianz, the study examined basic financial literacy knowledge as well as, for the first time on such a broad basis, the understanding of risk concepts. The study was conducted in close cooperation with Annamaria Lusardi, professor at the George Washington University and academic director of the Global Financial Literacy Excellence Center.

“What was shocking was that the dial has barely moved in terms of financial literacy,” commented Michela Coppola, one of the authors. “When the first wave of studies came out, the widespread lack of financial knowledge revealed sparked surprise and concern. Now, more than ten years and a global financial crisis later, results of this survey closely match the original studies.”

The Allianz survey revealed significant gaps in the understanding of finance-related concepts, which are considered key for making sound financial decisions. Interest rates and inflation appear easiest to grasp. On average, 76% of respondents answered the interest rate question correctly and 63% the inflation question correctly.

People “Don’t know” about risk

The share of correct answers fell in all countries when it came to the more complicated questions about risk. On average fewer than 50% of respondents answered correctly, although there are many differences between countries (see graph). In particular, the relationship between risk and return appears least understood in all countries except for the United Kingdom.

Respondents who answered all questions correctly

The lower share of correct answers on risk was due to the numbers ticking “Don’t know,” rather than answering incorrectly. The question that received the highest share of “Don’t know” was on risk diversification. Coppola, a senior economist with the International Pension unit, says, “What is surprising is that this question was the only one that did not require participants to make any calculations.”

“It shouldn’t be a difficult question,” says Coppola. “In the end, the adage to ‘Not put all your eggs in one basket’ is an old and widely understood one. However, the majority of Europeans do not seem able to transfer this knowledge to the financial realm.”

If you know something

The Allianz study broke new ground by testing how financial and risk literacy affects financial decision making. This question might appear redundant – after all, people with a better understanding of financial concepts should be more capable of making better saving, investment and financial product decisions.

However, says Coppola, it still needs to be shown that financial literacy could have a direct impact on the financial wellbeing of consumers, beyond other individual features related to financial literacy, such as general education or family background.

Respondents were given three scenarios involving longevity, diversification and liquidity risk. The aim was to see if people who have a good understanding of financial and risk concepts are also better at recognizing the right financial product for a specific financial need in a real-life situation. In all the scenarios, people with a high level of financial and risk understanding significantly outperform their peers with similar characteristics, such as age and education, but low financial and risk knowledge.

European financial literacy snapshot findings

Ten years after the first financial literacy surveys, little has improved
Austria, Germany and Switzerland top the ranking in financial and risk literacy while France and Portugal dwell at the bottom
Risk-related concepts are the most difficult to grasp in all countries and the least understood
Longevity risk is the easiest to grasp: elderly respondents performed better than younger ones yet 40% still gave a wrong answer
Diversification risk is the most difficult to understand: only 28% of respondents Europe-wide could identify the most suitable financial product
Women still lag behind men, particularly on risk-related questions
A university degree does not automatically make someone a financial expert – although it helps
Millennials (under 35) have the lowest financial and risk literacy, though this may change later in life
Overall, people make poor financial decisions when set in real-life context
People with a good grasp of financial and risk concepts are twice as likely as those without to make better financial decisions

“It is clear that not only financial, but also risk literacy could have an effect on the saving outcome and financial wellbeing of today’s savers, particularly in today’s low-yield environment,” says Coppola.

Ingo Mainert, a CIO of Allianz Global Investors, believes the results show that “there are too many people who are not familiar enough with the fundamental concept of risk and return.”

A deeply engrained risk aversion keeps many away from taking the appropriate level of risk that might help them achieve financial goals, he says. “In a time of digital transformation and increased individual responsibility for financial planning there should be even more emphasis on the foundations for better informed financial decision-making.”

Coppola says “the penny is yet to drop for many people in terms of financial literacy.” Women and younger people in particular seem to be lacking an understanding of financial concepts. “Such costs may not only be high for individuals, but also for entire societies that may need to support increasingly aging populations.”

Download the full report When will the penny drop? Money, mathematics and risk in the digital age

Europeans and financial literacy: when will the penny drop?

Financial and risk literacy are essential life skills, but a new survey reveals many Europeans still lack basic knowledge

Europeans and financial literacy: when will the penny drop?

Financial and risk literacy are essential life skills, but a new survey reveals many Europeans still lack basic knowledge

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