by Annamaria Lusardi

Overview

Basic risk comprehension is essential for managing personal finances and making informed financial decisions. The economic fallout of the global pandemic, financial market volatility, and rising inflation have made it clear that individuals must know how to navigate the many uncertainties that impact financial decision making. Yet, our research shows that risk and concepts related to risk are difficult for people to grasp. For example, of the Big Three financial literacy questions created by Lusardi and Mitchell (2011), significantly fewer respondents knew the correct answer to the risk diversification question while significantly more selected the “don’t know” response option.

By analyzing six years of data from the TIAA Institute-GFLEC Personal Finance (P-Fin) Index Survey, this paper sheds light on U.S. adults’ risk comprehension, particularly on a basic understanding of uncertain financial outcomes. The paper also provides information about average risk comprehension, the demographic groups that struggle the most, and links between risk comprehension and retirement planning and financial fragility.