In this paper, we use the FCA’s latest Financial Lives survey to explore the extent to which consumers understand the risks and potential returns associated with different ways of saving.
To make good saving decisions, consumers must understand the risks and potential returns associated with different ways of saving. This must include being able to make good quantitative assessments of risks and returns, not just whether an outcome is more or less likely. So, our research focuses on the consumers’ ability to assess the likelihood of future returns using probabilities.
Our results indicate that 38% of consumers are able to assign probabilities to future outcomes and show a high degree of financial sophistication. 29% are able to assign probabilities and show a moderate degree of financial sophistication. The remaining 33% are either not able to assign probabilities or show a low degree of financial sophistication.
This work also confirms that a substantial number of consumers with specific characteristics of vulnerability show considerable financial sophistication. This suggests targeting support specifically towards those with low financial sophistication might be more effective at improving saving decisions than focusing exclusively on other characteristics of vulnerability.
Melanie Lührmann, Sarah Reiter, Jonathan Shaw and Joachim Winter.
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