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Tuesday, July 22, 2008

Are You Financially Literate?

Dartmouth Econ. Prof. Annamaria Lusardi has devised the following test to determine a person's financial literacy. The results are disturbing. Only one third of the respondents that were older than fifty managed to get all three questions right. For the answers to the three questions and an interesting interview with Prof. Lusardi, follow this link.

1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

a. More than $102
b. Exactly $102
c. Less than $102
d. Do not know

2. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?

a. More than today
b. Exactly the same as today
c. Less than today
d. Do not know

3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”

a. True
b. False
c. Do not know

P.S. More on Lusardi here.

Posted by A.S. Erickson at 11:19 PM

Comments

These questions are so ridiculously easy I hope 100% of Dartmouth students get them correct. The 2% interest one would be a little more interesting if the choice was above or below $110, at least then it would be a test of whether you understand compounding.

Posted by Anonymous Dave '96 — July 23, 2008 12:22 PM  

Suppose a company has outstanding 8 million shares of Class A stock, 8 million shares of Class B stock, and 2 million shares of Class C stock. You and your family control the Class B shares. The Company issues 8 million additional shares of Class A stock. Has your interest been diluted, or is it the same as before?

Posted by Anonymous Warren Soros — July 23, 2008 12:42 PM  

Another financial test:
Over time generous benefactors have made donations for a recreational club's maintenance of cabins, resulting in an endowment specific to this purpose of $1,000,000. The endowment throws off 5% or $50,000 per year in dividends. What are the best uses of the $50,000:
1. Spend it all, even if annual cabin maintenance only requires $5,000 per year.
2. Ask that it be reinvested as additional endowment capital; it will help increase future earnings by $2,500/year (5% of $50,000), but will never again be available for direct needs.
3. Reserve the extra $45K of it in a special account, until after 4 years it builds to $180,000 and can be used in support of club members building a major new cabin from scratch.
4. Do nothing, so it can help offset Student Life Department social programming like Kick-@$$ parties and training by the Sexperts.

This question is formulated with a bit of understanding of how university endowments and politics work. Its formulation and the correct answer are not based upon any confidential information; similarities to any real situation is purely coincidental.

Posted by Anonymous Golden Goldman Alum — July 23, 2008 4:35 PM  

These questions are so ridiculously easy I hope 100% of Dartmouth administrators get them correct.

Posted by Anonymous thank you dave 96 — July 23, 2008 4:39 PM  

If contributions to pet projects, like those found at Ivy League colleges, were no longer tax deductible, what would you do?

a) I'd give the money anyway;
b) I'd give the money to a real charity;
c) I'd let my kids inherit more.
d) I'd blow more on my bimbo.

Posted by Anonymous A Concerned Trustee — July 23, 2008 9:05 PM  

Honey, If you don't say d, I'll hide your pills

Posted by Anonymous Bimbo — July 23, 2008 9:48 PM  

I wouldn't be so sure all students will get the right answers. Some students believe that if you want to be able to vote for a corporation's directors, all you have to do is consume its services.

Posted by Anonymous parody slate — July 24, 2008 3:36 PM  

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Posted by Anonymous anonymous — July 24, 2008 8:28 PM  

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Posted by Anonymous Anonymous — July 24, 2008 9:07 PM  

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Posted by Anonymous Anonymous — July 24, 2008 9:17 PM  

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