Measuring and Wasting Financial IQ

April 5, 2009 by  
Filed under Money and Behavior

financial_intelligenceI wasn’t planning on writing anything today but I came across an article from the Associated Press that provoked me into changing my mind. I had to say something about it, if only briefly. It’s about measring and using our financial IQ.

Measuring Your Money Intelligence

The article contains another one of those brief quizzes designed to assess the reader’s “financial IQ.” I have seen dozens of these published over the years. This one is particularly elementary and superficial. As one example, consider this question:

I’ve pulled a lot of my money out of the stock market waiting for a good time to reinvest. The best sign of a market turnaround, telling me to get back in is:

(a) A huge spike in trading volume meaning lots of people are getting back in at once

(b) Several days in which volatility has stabilized

(c) Markets continue to climb despite news or other events putting downward pressure on them

(d) Nobody really knows

Is there any doubt about the correct answer to this question?

These “are you smart about money” tests can have one positive benefit. If they cause those who are completely clueless about money to recognize and then seek to remedy their financial ignorance, that is a good thing. I doubt that ever happens.

Looking at the Wrong Financial Data Set

The real weakness with financial IQ self-assessments is that they measure the wrong thing. In doing so, they can create false confidence. More to the point, doing well on a money intelligence test can cause the test-taker to mistakenly believe that he or she is destined to succeed financially.

While it’s true that the U.S. is chock-full of adults who lack basic money management skills, it’s also the case that millions of consumers have money knowledge but refuse to act in accordance with that knowledge. Not only do they ignore the basic rules of saving, spending, investing, and use of credit, they refuse to learn from their own mistakes.

Even in the world of those who blog about personal finance, I regularly find evidence of those who don’t follow their own advice. (And those are just the bloggers who are willing to write about it!)

In short, many of us are wasting our financial IQ.

The hard truth is that the financial IQ tests are amusing but are measuring the wrong data. These tests should force readers to examine their actual money behavior. It doesn’t help to know how smart you are about money if you are not also challenged to show that your actions conform to your level of money intelligence.

In fact, you could probably red flag a lot of the folks who score well but waste their financial IQ by including a simple question like this:

How much did your net worth change this past year?

a. It decreased by more than 5%

b. It increased by more than 5%.

c. I don’t care – I only track my credit score.

d. I’m afraid to look.

Of course, if someone is willing to take a test of money behavior, the trick is to direct those who score poorly in a new direction. They best way to do that is to let them suffer the consequences of their bad decisions. Unfortunately, our government seems unwilling to let that happen.

Image credit:  Lusi

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4 Responses to “Measuring and Wasting Financial IQ”
  1. kitty says:

    I actually don’t think your net worth question has much meaning, especially during last year.

    The answer to this question is very dependent on how much money you had in the market. It doesn’t even matter which percentage of your assets were in the market or which percentage you lost, just an amount and whether this amount is small enough that you could have saved enough to compensate. Because if the amount you lost exceeded your yearly gross, there is no way you can save enough to see your net worth increase. Someone with a million dollar net worth who had 50% of money in the market could have easily lost more money than he or she can save during the year. At the same time, someone with only 10K worth of savings all of it in the market – pretty stupid, right? – would’ve only lost 5K and could have easily see net worth growth. Someone with a negative net worth could have seen it grow by simply paying off 5% of debt. Of course there were some smart people who got out of the market on time, but other than that, the higher your net worth was in the beginning of 2008 the more likely you were to lose more money than you could save.

    As to being afraid to look – again, there could be two reasons: you don’t have much or you lost too much.

  2. MasterPo says:

    If you can’t take the risk of loss – no matter how small – you don’t belong in the market. Stay with CDs and Treasuries.

  3. Roger says:

    Very good points; as with many fields, it’s not how much you know, but what you do with that knowledge. Maybe, if we keep making that point, it’ll change what gets tested in these PF quizzes, and how people view true financial IQ

  4. Poor Boomer says:

    I disagree with TML. I usually score very high on “financial literacy” tests but as you all know, I’m not amassing any wealth.

    I am not “wasting” (as TML implies) my financial literacy, I merely lack the income necessary to build wealth.

    Or does TML expect that hamburger flippers and people living at poverty level can build net worth through applied financial literacy?

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