Irrational agents

Dartmouth Economics Professor Annamaria Lusardi asked Americans the following questions to assess American financial literacy:

1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

a. More than $102
b. Exactly $102
c. Less than $102
d. Do not know

2. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?

a. More than today
b. Exactly the same as today
c. Less than today
d. Do not know

3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”

a. True
b. False
c. Do not know

Half the respondents age 50+ answered the first two question correctly; 1/3 answered all three correctly. Wow.

[more from the NYT Freakonomics blog]

What amazes me is not Americans' lack of general knowledge about such a conspicuous subject of current events. When god in school debates spring up in the news media I doubt people unfamiliar with theories of evolution rush to learn about it to keep up with things. The crazy thing about economic illiteracy is how obviously harmful it is to nearly any individual's self-interest.

If you're wondering like I am how the US can simultaneously have such a high percentage of idiots, be a democracy, and have the world's largest economy, here's an excellent NPR Science Friday interview of Michael Mauboussin on the subject of how markets might function in the absence of rational agents. Agent diversity, information aggregation mechanisms, and incentives are the critical components of Mauboussin's efficient economy low on rationality.