In the film Idiocracy, the main character, an average Joe played by Luke Wilson, awakens in the distant future to discover that he is by far the smartest person on the planet. During an IQ test, he is asked:
If you have one bucket that holds two gallons and another bucket that holds five gallons, how many buckets do you have?
It’s a satire of a very dumb future, but I was reminded of this scene when I saw the survey questions the Federal Reserve Board of Atlanta recently asked of subprime borrowers.
The authors wanted to explore the relationship between financial illiteracy and foreclosures. Not surprisingly, those who couldn’t answer such basic questions had a much higher rate of foreclosure. The results held up when controlled for cognitive ability, ethnicity, and other variables.
See for yourself:
The Fed’s Financial Literacy Quiz
* CPD – Cumulative Probability of Default over the life of a 5-year credit default swap contract. In other words, the market is estimating California’s chance of default in the next five years as one of five.