The stats are clear: a lot of people don’t know much about financial matters. A recent report by the UK’s Money Advice Service found that 16% of people could not identify the balance on a bank statement, and 35% of people incorrectly thought that 5% inflation did not diminish the purchasing power of a savings account with 3% interest rate.

I can think of plenty of reasons to be worried about these figures. But do they matter for immediate economic decisions and outcomes? Perhaps people can manage their finances without looking up their balance on statements, and knowledge of real interest rates is arguably not required  unless we’re in times of persistent negative real interest rates (let’s hope that’s not the case right now). Perhaps people will adapt when required – experienced inflation surely hurts a lot more than imagined inflation.

The more general question is: does poor financial knowledge cause poor financial health? A thought-provoking recent paper by Schmeiser and Seligman in the Journal of Consumer Affairs (JOCA – you would publish there just for the acronym) suggests that correctly answering financial knowledge questions “has little significant relationship to changes in wealth over time.” Shocking stuff.

Now, Schmeiser and Seligman only look at changes in non-housing wealth over a short period of time (2002-2008). When they look at total wealth, they do find a positive effect of knowledge. But individual bits of knowledge add little explanatory power – they all seem to measure roughly the same thing.

Which reminds me of several studies that find that mathematical ability, not financial knowledge per se, is strongly correlated with financial health (see here). And a recent meta-analysis by Fernandes, Lynch and Netemeyer that reports that the measured effect of  financial education pretty much disappears once psychological factors are taken into account.

Does all of this mean that educating people about financial matters is not worth it? I don’t think so. I think it means that we know very little about the long-term usefulness of possessing particular bits of financial knowledge, and that the “training course” approach to improving financial knowledge is still scientifically unproven. But I’m cautiously optimistic that the “Test, learn, adapt” approach will start filling in some blanks in the next few years.