Risk Literacy

Risk Literacy

I examine financial literacy — specifically knowledge of risk — using data from surveys in the United States and other countries. I show that risk literacy is very low; the majority of individuals lack knowledge of concepts such as risk diversification and do not understand the relationship between risk and return. Findings are strikingly similar across countries; a third of survey respondents in most countries report that they do not know the answer to risk literacy questions. I also show that risk literacy matters for financial decisions; those who are more knowledgeable about risk are more likely to have precautionary savings and to plan for retirement. Given that individuals have much greater responsibility for their financial well-being before and after retirement than in the past, addressing lack of financial literacy, including risk literacy, may provide new ways to promote saving and financial security.

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