To thrive in today’s economy, people need financial knowledge. Yet as financial products have grown increasingly complex, consumers’ understanding of personal finance has failed to keep pace. According to the Personal Finance Index, a long-running survey of financial literacy, American adults can correctly answer about half of a set of questions that measure knowledge of personal finance concepts. They especially struggle with questions about managing financial risk.
Poor financial literacy is a significant problem since it generally translates into lower financial well-being, explains Annamaria Lusardi, a professor of finance (by courtesy) at Stanford Graduate School of Business and one of the creators of the P-Fin Index. People with low financial literacy are more likely to have trouble making ends meet and less likely to have emergency savings. Financial literacy tends to be lower among women, members of Gen Z, and Black and Hispanic Americans.
“Financial literacy is very low – not just in the U.S., but around the world,” Lusardi says. “People just do not have those basics, even though they’ve made a lot of financial decisions. We can and we should find ways to improve it. The world is too complex to rely on only the knowledge people currently have.”
Lusardi, a senior fellow at the Stanford Institute for Economic Policy Research (SIEPR) who directs the Initiative for Financial Decision-Making (IFDM) at Stanford GSB, has dedicated her career to exploring interventions that can reverse financial illiteracy. Part of her work has been advocating for schools at all levels to teach financial literacy. “It’s very dangerous to have a population of young people with student loans who don’t know what an interest rate is or how interest compounds.”
At Stanford, she teaches the popular Introduction to Financial Decision-Making course. (The class has been a particular hit with student-athletes. “They realize they can make quite a bit of money right away and are becoming more and more aware of how important it is to manage their finances well,” she says.) However, as more schools add financial literacy courses, older Americans and young people who don’t finish high school or attend college can miss out on these lessons.
The good news is that it is not impossible to pick up new financial knowledge later in life. In a new paper, Lusardi teamed up with Robert Clark of North Carolina State University, Chuanhao Lin of George Washington University, Olivia Mitchell of the University of Pennsylvania, and IFDM research director Andrea Sticha to test a simple program that teaches adults basic financial concepts through stories. They found that this inexpensive, easily scalable initiative boosted participants’ financial knowledge.
Learning the basics in two minutes
Lusardi, Sticha, and their colleagues focused on consumers who had made significant financial decisions in their lives, but likely had little or no formal education in financial literacy. Their sample included more than 2,200 American adults ages 45 and older.
The researchers crafted simple narratives about three financial fundamentals: compound interest, inflation, and risk diversification.
The compound interest story tells the tale of 25-year-old newlyweds who received $5,000 in cash as wedding presents and needed to decide what to do with the money. After discussing the Rule of 72 – a way to calculate how long an investment will double at a fixed annual rate of return – the couple chose to invest the gift right away. The inflation story features Lisa, who learns to save more for the future by seeing how the price of a cute plaid shirt had changed over time. In the risk diversification story, Kate and her husband Sam must decide what to do with the money from selling their car. They discuss a long-term investment in the stock market and diversifying their portfolio to minimize the risk of losses.
Each story took two minutes to read. The researchers divided participants into four groups, one for each story and a control group that didn’t read a story. After reading the story, each participant answered questions to test their knowledge of the assigned topic.
All three stories boosted participants’ financial knowledge, particularly the one about risk diversification. Participants who read that story were 17 to 18 percentage points more likely to answer the related questions correctly than the control group, and the story resonated most with people with lower education and income levels. People who read the inflation story were 6 to 8 percentage points more likely to get the questions correct, and those who read the compound interest story were 17 percentage points more likely to correctly answer one of the questions.
“Even a simple story can improve knowledge, and in fact it does so quite a bit,” Lusardi says. “Finance is considered complex, and a story might take away that complexity. Stories are often how people understand concepts; they’re very memorable.”
In a follow-up survey eight months later, the researchers tested the participants’ knowledge again. Those who had read the risk diversification story retained nearly half of their short-term knowledge of the topic. The effect was not so robust for inflation and compound interest, trickier topics that involve more mental math. Still, people who read the inflation story spent more time answering questions on the effect of inflation on real income, suggesting that exposure to the story had boosted their interest in the topic.
A long-term investment in financial literacy
Finally, the researchers measured the stories’ impact on four indicators of financial distress (financial fragility, over-indebtedness, financial dissatisfaction, and difficulty making ends meet) and a financial resilience index. Eight months after the initial study, they found no difference in how participants responded to these indicators. One explanation could be that not enough time had passed. “Some of this behavior takes time to change, and eight months may not be enough,” Lusardi says. Subsequent research will look at whether reminders can help people retain key financial concepts and shape their behavior.
Still, the intervention shows promise as a real-world tool that can be easily implemented, Sticha says. For example, banks could use similar stories to inform their customers, and companies could use this approach as part of a workplace financial wellness program. Lusardi hopes the work will help change the conversation about money in society, making it less taboo. “We don’t talk enough about it,” she says. “Finance should be woven into the fabric of society and be a part of our daily life.”
Even a simple story can improve knowledge, and in fact, it does so quite a bit.”Annamaria LusardiSenior Fellow at SIEPR
She’s heartened by the successes she’s had in Italy. From 2017 to 2023, the Italian-born Lusardi directed the country’s Financial Education Committee, which designed a national financial literacy strategy. The committee launched a dedicated financial education website, established October as Financial Literacy Month, and played a key role in passing legislation that made financial education mandatory from elementary school onward. And she even brought financial lessons to a broader audience by integrating them into a popular Italian soap opera.
Lusardi has already seen successes at Stanford. Students in her course frequently share lessons with their parents and siblings or write to her with updates on their own financial decisions. A rigorous course like Stanford’s is the gold standard for financial literacy, Sticha notes. But, in the absence of that, a simple, low-cost, story-based financial intervention program can still be effective in increasing access to financial education.
“In finance, ignorance is not bliss,” Lusardi says. “The fact that people don’t understand the basics is a huge problem, and we are going to pay the costs of financial illiteracy. We just have to decide how. Do we want to pay for prevention, or do we want to pay for the cure?”
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This story was originally published by Stanford Graduate School of Business.
