The human brain is a marvellous thing but it does not seem to have evolved to cope with high finance. I’ve written before about the economist and financial literacy expert, Annamaria Lusardi. One of her findings is that one-third of Americans over the age of 50 failed to answer this question correctly: “Suppose you had $100 in a savings account and the interest rate was 2 per cent per year. After five years, how much do you think you would have in the account if you left the money to grow: more than $102, exactly $102, less than $102?”
One answer to this woeful situation is financial education. But can such depths of ignorance be paved over with a few evening classes? Another option is to nudge us into sensible decisions – for example, by automatically setting up pensions for us. Again, this is fine as far as it goes.
A third line of attack, embraced by some financial gurus, is the rule of thumb.