Italian Economic Journal | Volume 1 | No. 1 | March 2015
Abstract: I examine financial literacy—specifically knowledge of risk—using data
from surveys in the United States and other countries. I show that risk literacy is very
low; the majority of individuals lack knowledge of concepts such as risk diversification
and do not understand the relationship between risk and return. Findings are strikingly
similar across countries; a third of survey respondents in most countries report that they
do not know the answer to risk literacy questions. I also show that risk literacy matters
for financial decisions; those who are more knowledgeable about risk are more likely
to have precautionary savings and to plan for retirement. Given that individuals have
much greater responsibility for their financial well-being before and after retirement
than in the past, addressing lack of financial literacy, including risk literacy, may
provide new ways to promote saving and financial security.