Americans Flunk in Basic Knowledge of Finance

Feb. 6, 2002 -- Americans got a report card today on their financial literacy and the average grade was an "F."

In a recent survey, Americans scored an average 42 percent on a 14-question test of basic knowledge of personal finances. For instance, two-thirds falsely believe there is "an organization that insures you against losing money in the stock market or as the result of investment fraud."

Another 45 percent falsely believe diversification is "a guarantee" investments will do well even if the stock market falls. And 63 percent do not understand the basic concept of inflation.

High school seniors did even worse on a separate personal finance quiz, with 82 percent failing questions on issues like interest rates, savings, loans, credit cards, and calculating net worth.

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Will the 'System' Save the Ignorant?

The lack of financial literacy is particularly worrisome now, as one lesson of the Enron debacle is that investors cannot count on "the system" to protect them.

"There was, as the Enron collapse demonstrated, an across the board failure.The auditors failed. The Enron board of directors failed. The regulators failed," commented Stephen Brobeck of the Consumer Federation of America.

On Capitol Hill on Tuesday, a powerhouse trio including Treasury Secretary Paul O'Neill, Federal Reserve Chairman Alan Greenspan, and the head of the Securities and Exchange Commission Harvey Pitt agreed the country needs to do a better job of educating Americans in the basics.

But as one senator pointed out, you need to know a lot more than the basics to spot an Enron coming. "What does it take to survive in the markets? Does it take a Ph.D. in finance?" asked Sen. Richard Shelby, R-Ala. "If it takes a Ph.D., then we've failed," responded Pitt.

Pros Short on Information, Too

In the wake of Enron's collapse, even professional investors are concerned they may not have enough information.

"Whether you're a mom and pop investor from the heartland or whether you're a professional money manager," observed market analyst Arthur Hogan, "You still have a feeling that you don't know exactly what's going into the books of corporate America."

Companies suspected of cooking their books — the conglomerate Tyco International is a case in point — are being hammered by investors. Tyco stock was down another 22 percent today, and has dropped 57 percent in the last month.

What Wall Street calls "Enronitis" is even spreading to the most reputable companies. Today, for instance, General Electric had to defend itself against suggestions it was overestimating its profit potential.

So how are we supposed to invest? That's what has the market on edge. The uncertainty surrounding the integrity of a company's financial statements, and the integrity of the accountants that audit them, is keeping people from investing or prompting them to sell.