Albert Einstein observed “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
A break from China specifically this week as I highlight a paper from Antonia Grohmann (et al) from the Leibnitz University Hanover who wants to know where financial literacy comes from?
This is an important subject for anyone who wants their children to have a better life. From previous studies Ms. Grohmann reminds us that there’s little evidence that numeracy or economics classes at school reliably raise the level of financial literacy.
Using data from a survey of middle class respondents in an emerging market, in this case in Bangkok Thailand in 2012, she determines that only two things reliably predict financial literacy in adults; a well educated mother and an early appreciation and experience for/with saving and budgeting.
She stops short of a policy recommendation but the practical implications for any of us with the ability to influence the behavior of young people are clear. A bank account and a regular allowance from an early age with an accent on saving are probably the best and lasting gifts you can give a child; at least from a fiscal point of view.
You can access the paper in full via the following link Roots of Financial Literacy
Happy Sunday
[BTW, in academic circles there’s a standard test for financial literacy applied around the world.
Care to take it?
Here are the three standard questions (an extra one was added for this particular survey, not relevant here) the survey participants were asked:
1. Interest rate: If you borrow 10 000 Baht, at an interest rate of 2 % a month, after 3 months how much do you owe? a) Less than 10 200 Baht b) More than 10 20 0 Baht c) Exactly 10 200 Baht
2. Inflation: If you have 10 000 Baht in an account, the interest rate on the account is 1% per year, and the price of goods and services rises by 2% per year, after one year can you buy: a) Less than today b) More than today c) Exactly the same as today
3. Diversification: Buying a single company’s stock is safer than buying a stock mutual fund. a) True b) False
Around the world the results come out pretty consistently and Bangkok wasn’t materially different; just over 17% of respondents got all three questions right. Credit card, insurance and finance companies seem set to stay in business a lot longer I guess?]