Assessing the economic and financial knowledge of adults

The chapter investigates factors that influence adults' knowledge of economics and personal finance. The authors surveyed a sample of adults with a norm-referenced exam that includes questions specific to economics knowledge and questions specific to financial knowledge, along with a background questionnaire. A two-equation seemingly unrelated regression system was estimated that included the percent correct economics sub-score and percent correct financial sub-score as separate dependent variables as functions of the same set of background explanatory variables. They found that some factors such as age, education level and income were associated with how much adults know about finance and economics, with the larger estimated influences found with respect to financial knowledge. Formal economics coursework influenced knowledge of economics, but not financial knowledge, while owning a home was associated only with greater knowledge of finance. The results suggest life experiences influence financial knowledge more than economics knowledge, and formal instruction in personal finance alone is insufficient preparation for making sound economic decisions on financial matters. An understanding of the economic way of thinking, learned mostly though formal instruction, combined with knowledge of personal finance can help people make wiser financial decisions.