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Financial innumeracy

Author

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  • Franses, Ph.H.B.F.
  • Vlam, A.

Abstract

Consumers often have to make decisions involving computations with interest rates. It is well known from the literature that computations with percentages and thus with interest rates amount to a difficult task. We survey a large group of consumers, and we find that questions on interest rates are answered correctly in about 20% of the cases, which in our setting amounts to a random choice. Additional to the available literature, we also document that consumers are too optimistic in the sense that they believe loans are paid off sooner than is true, which provides empirical evidence of self-serving bias. We further find that optimism can be reduced by increasing the monthly payments. The results are robust to corrections for general numeracy.

Suggested Citation

  • Franses, Ph.H.B.F. & Vlam, A., 2011. "Financial innumeracy," Econometric Institute Research Papers EI 2011-01, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    • Handle: RePEc:ems:eureir:22234
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    References listed on IDEAS

    as
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    6. Haipeng (Allan) Chen & Akshay R. Rao, 2007. "When Two Plus Two Is Not Equal to Four: Errors in Processing Multiple Percentage Changes," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 34(3), pages 327-340, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    D14; D91; financial innumeracy; interest rates; numeracy; percentages;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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