Adventures in financial literacy

By Felix Salmon
April 12, 2010
This is one of the silliest things I've read in ages:

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This is one of the silliest things I’ve read in ages:

As economists, elected officials and the American public ponder how to strengthen the U.S. economy by rebalancing the nation’s spending and consumption with savings and investment, an alarming majority of U.S. teens say they lack the knowledge to understand and effectively reconcile the two, according to the eleventh annual “Teens and Personal Finance Survey” conducted by Junior Achievement (JA) and The Allstate Foundation.

The poll itself shows that, contra the alarmism of the press release (and of certain coverage thereof), teens are in fact perfectly sensible when it comes to their personal finances. When asked why they don’t use a budget, for instance, the top two answers are very good answers indeed: “My parents take care of all my expenses”, and “It’s not necessary given the amount of money I have.”

The poll affects surprise that only 58% of teens are interested in money management and that 54% of them say they are unsure about how to effectively use credit — but the simple fact is that teens tend to have one of the best money-management systems in the world. They know exactly how much money they have at any given time, and they have no access to credit at all, so if they want something they have to save up for it. (Or get someone else, like their parents, to buy it for them.) And of course they’re unsure how to effectively use credit, for much the same reason that I’m unsure how to effectively fire a grenade launcher.

But the most delicious part of the whole survey is this pair of charts. Remember that they’re being published by an organization which is trying to teach financial literacy:


“Percentages may not total 100 due to rounding”, it says, which might can’t explain why the right-hand chart adds up to 102% 112%, and which also doesn’t explain why the colors on the right-hand legend are mixed up, with the lime-green and brown colors switched.

More seriously, the left-hand chart, which adds up to only 88%, shouldn’t be a pie chart at all, since it’s not meant to add up to 100%. It’s just the percentages of teenagers who answered in a certain way to three entirely different questions. There’s no pie here to chart: no whole which is split up into differently-sized pieces. Is it too much to hope that a financial-literacy organization might display a bit of financial literacy itself, before it starts getting all alarmist about the fact that teenagers don’t tend to worry overmuch about where to invest their nonexistent savings?

Update: JA, which put the survey together, responds in the comments, and still doesn’t get how stupid these pie charts are! If this person really doesn’t understand why a pie chart has to add up to 100%, I’m more convinced than ever that they have no business preaching financial literacy. Also in the comments, maynardGkeynes makes a point I’ve made many times in the past: that it’s a good thing to know that you don’t know about money. If you run these teens through a financial-literacy program, they’ll say they’re more financially literate than they do right now. But, in truth, they won’t be — they’ll just be more overconfident than they are right now when it comes to matters financial.


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85% + 22% + 5% = 112%

Posted by Funisnotfinance | Report as abusive

Felix, thank you for your interest in the Junior Achievement Teens and Personal Finance Survey. While JA takes responsibility for the error in the key for the right-hand chart above, I would like to point out that the left-hand chart does indeed represent responses to one question.

In addition, the footnote which you partially captured vis-a-vis rounding, also says that “multiple responses may have been permitted.” So the fact that the right-hand chart’s responses total 112 (rather than 102), is not an inaccuracy or misleading.

Your readers may be interested to know that Junior Achievement does value accurately representing its data, and that we’re also willing to admit when we make an inadvertent error, such as the color key.

I would also respectfully contest your assertion that teens possess sound money-management systems, given the bankruptcy rate among young adults.

Lastly, you may not know how to fire a grenade launcher, but then, you’re probably not receiving “free” grenade launchers in the mail. Many teens and young adults do receive numerous credit offers, and like any tool or weapon, they can backfire catastrophically if misused.

Again, thanks for your interest in our survey and for the opportunity to clarify some of the points you make above.

Posted by sbellJA2010 | Report as abusive

Speaking of financial literacy, I work in IT on wall street, and have been here for about 7 years. While interviewing job candidates, most of whom have been working in wall street IT far longer than I, only a tiny fraction can correctly describe the differences between a stock and a bond. A vast majority of these claimed to do their own investing. I often set up a problem involving a corporate bond, and it just blows their minds. I’ve had candidates tell that me corps don’t issue bonds- only governments.

If the pro’s don’t get it, what can we really expect of Joe Average high school student, who’s only participation in the economy thus far has been his paper route that feeds his video game habit?

Posted by drtomaso | Report as abusive

sbellJA2010- It doesn’t change the fact that you are using pie charts, which represent shares out of a whole, to display overlapping percentages. A Venn diagram or even a simple bar chart would have more accurately described the results without being misleading.

The pie charts are misleading because the relative sizes of slices of the pie are meaningless in comparison to one another. For example, 45% of those surveyed said they were confident they would be able to effectively invest their own money, while 25% were confident of their ability to budget. I am guessing that a large number of those confident in their ability to invest were also confident of their ability to budget. They are percentages that are not comparable using the term “vs”.

Posted by drtomaso | Report as abusive

I’d say it’s a tribute to teens that only 45% think they know something about investing. Although the correct answer is 1%, the teens are a lot closer to the truth than their parents, who are no less clueless, but who live under an insane delusion of competence.

Posted by maynardGkeynes | Report as abusive

I find the “pie charts” hilarious! As Dr. T suggested, a bar graph would be most straightforward.

But Felix, I think you miss the point. Teenagers can depend on their parents to manage the finances, but a few years later they will be doing so on their own. According to this page, the average college student graduates with $2700 of credit card debt. articles6.html

Seems they find the trigger on that grenade launcher soon enough upon leaving home.

Posted by TFF | Report as abusive

I attended an academic seminar recently where the main argument was that households are financially unsophisticated because they do not diversify, and empirical evidence was presnted to confirm this. Why this made them unsophisticated was because the Capital Asset Pricing Model says that investors should be diversified.

I suggested an alternative explanation. That you would expect households to be very sophisticated about their own finances, and that maybe it is the CAPM that is unsophisticated. After all, the CAPM is about as simplistic as you can get in terms of its assumptions, and it is easy to show they are plain wrong.

This article reminded me of that seminar.

Posted by will1 | Report as abusive

As a veteran Junior Achievement volunteer teacher I can reassure you that the material taught in classes are pretty damned simple and not really about long-term investment management, but about saving a bit for rainy day and understanding the dangers of credit.

Their history goes back around 100 years, and at various times the movement has been funded to ensure the youth grow up as fine capitalists and not bad commies… Their teaching materials often read like something from a Reagan speech.

Felix you ought to give it a go volunteering. JANY is the local organization in NYC, and I did my teaching in Harlem.

Posted by nicfulton | Report as abusive

There is a difference between financial literacy and numeracy.
You could probably balance your budget without being able to understand when a venn diagram or bar chart is more appropriate than a pie chart.

For the right hand “pie” allowing multiple answers was the mistake. The questions should have been:
A. You manage your money.
B. You don’t manage your money.
C. Don’t know/not sure/refused.

The left hand pie is simply a disaster. As pointed out MANY times; it isn’t a pie.
At best it is three pies:
1 Invest your money: 55% sure 45% not very sure/not sure at all.
1 Budget your money: 75% sure 25% not very sure/not sure at all.
1 Spend your money: 82% sure 18% not very sure/not sure at all.

Posted by TinyTim1 | Report as abusive