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Financial literacy and financial sophistication in the older population*

Published online by Cambridge University Press:  26 February 2014

The George Washington School of Business, 2201 G Street, NW. Suite 450E, Duquès Hall, Washington, D.C. 20052, USA (e-mail:
The Wharton School, University of Pennsylvania, 3620 Locust Walk, Ste. 3000 SH-DH, Philadelphia, PA 19104, USA (e-mail:
Department of Economics, Stanford University, 579 Serra Mall, Stanford, CA 94305, USA (e-mail:


Using a special-purpose module implemented in the Health and Retirement Study, we evaluate financial sophistication in the American population over the age of 50. We combine several financial literacy questions into an overall index to highlight which questions best capture financial sophistication and examine the sensitivity of financial literacy responses to framing effects. Results show that many older respondents are not financially sophisticated: they fail to grasp essential aspects of risk diversification, asset valuation, portfolio choice, and investment fees. Subgroups with notable deficits include women, the least educated, non-Whites, and those age 75+. In view of the fact that retirees increasingly must take on responsibility for their own retirement security, such meager levels of knowledge have potentially serious and negative implications.

Copyright © Cambridge University Press 2014 

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The research reported herein was conducted pursuant to grants from the US Social Security Administration (SSA) to the Financial Literacy Center and the Michigan Retirement Research Center funded via the Financial Literacy Research Consortium and the Retirement Research Consortium. Additional support was provided by the Pension Research Council and Boettner Center at the Wharton School of the University of Pennsylvania, and the FINRA Investor Education Foundation. We are grateful to Richard Derrig for sharing his PRIDIT code and to our editor, Julie Agnew, and anonymous referees for comments. Opinions and errors are solely those of the authors and not of the institutions with which the authors are affiliated.


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