Financial knowledge is a critical factor that explains why one segment of the population is better able to cope with the shock compared to others. However, our results show the level of financial literacy is disastrously low. To measure the level of financial literacy, we asked four questions relating to different financial skills: numeracy, interest, accounting, and inflation. Overall, only 28.5% of all respondents answered all four questions correctly. Even more alarmingly, we found a financial literacy gender gap in all countries: 36.4% of the men we surveyed were financially literate compared to 20.7% of the women in our sample. This added to the greater financial impact of women creates a perfect storm scenario for the pandemic to become a “she-cession”.
The level of risk literacy is also (very) low (22.8%) and the gender gap pervasive (9.6 percentage points). But our survey could not prove the hypothesis that our risk profile is determined by our risk literacy: high-risk aversity could be found among “literate” as well as “illiterate” respondents. The on average higher risk aversity among female respondents’ points at other, unobservable factors like personality or social role expectations.
Nevertheless, higher financial literacy seems to lead to better-informed investment decisions in times of negative real interest rates. When asked to invest EUR1,000, financially “literate” respondents preferred securities (35%) to bank deposits (22%); “illiterate” respondents answered the other way round (27% vs 30%). Thus, financially savvy savers are more likely to avoid falling into the trap of investing in supposedly safe but loss-making assets in times of negative real interest rates. Even more disturbing: “illiterate” respondents are more likely to invest in cryptocurrencies (12%) than in insurance related products (9%).
What does this mean for policymakers and the finance industry? The disastrously low levels of financial and risk literacy are a call for action. The investment environment was challenging even before Covid-19 hit economies and markets. It has become more difficult ever since. Without sound knowledge, many households are doomed to make the wrong financial decisions, with devastating consequences for the financial well-being in the future. The upshot: Financial literacy should become part of the normal curriculum for schools and the industry should double down its efforts for simple, easy to understand products.