inancial literacy is often defined in academic research through three core concepts known as the “Big 3.” This framework was largely developed by economists Annamaria Lusardi and Olivia S. Mitchell. Their goal was to measure understanding of compound interest, inflation, and risk diversification using just a few precise questions.
In one of their foundational studies (Lusardi & Mitchell, 2011), they demonstrated that significant knowledge gaps exist worldwide — even in advanced economies — when it comes to these basic financial mechanisms. The model is also regularly applied in Switzerland to assess levels of financial literacy.
A 2024 study by the University of Zurich on financial literacy, led by Prof. Uschi Backes-Gellner and Dr. Maddalena Davoli, found that Switzerland rated very well in comparison with other countries. The questions in the study were formulated in such a way that the answers are comparable in terms of the “Big Three”. Some 54% of all respondents answered every question correctly. Norway and Sweden, with 70% of respondents posting a perfect score, placed higher than Switzerland.
Compound Interest
The first dimension tests understanding of earning interest on interest. It examines whether individuals can correctly assess the exponential growth of capital over time. Many investors, however, struggle to grasp the long-term numerical impact of compound interest. While the principle is often understood in theory, in practice the so-called “exponential growth bias” frequently appears — the human tendency to expect linear growth where exponential growth actually occurs.
Inflation
The second concept focuses on purchasing power. It asks whether people understand that money loses value when prices rise, unless it earns at least the rate of inflation. A survey conducted by Raiffeisen, for example, shows that the concept of inflation is well understood in Switzerland: around 87% of respondents know that purchasing power declines when inflation exceeds interest rates.
Data from the Swiss National Bank (SNB) confirm that inflation in Switzerland is low by international standards. However, they also demonstrate that over decades, cumulative inflation significantly erodes the value of cash holdings.
Risk Diversification
The third dimension identified by Lusardi and Mitchell is risk diversification. It assesses whether individuals understand that investing in a single company (for example, one stock) is riskier than investing in a broad basket of different securities. Understanding diversification is strongly correlated with educational attainment and experience in dealing with financial products.