Risk Knowledge Gap Leaves Investors Vulnerable, FINRA Study Finds

Most retail investors understand the basics, but far fewer grasp the risks that can make or break a portfolio. That gap carries real consequences, from fraud vulnerability to weaker retirement readiness, and it comes as rising interest rates and complex products put risk literacy to the test.

The FINRA Investor Education Foundation and Stanford Initiative for Financial Decision-Making analyzed 2,861 respondents from the 2024 National Financial Capability Study who owned investments outside retirement accounts.

Using 13 knowledge questions, researchers classified 18% as having advanced investment literacy, 66% as basic-only and 16% as low literacy.

Advanced knowledge largely involved understanding risk, including diversification, interest-rate sensitivity, leverage, short selling, options and payment priorities in bankruptcy.

“Most of the investors we studied know the basics, but very few have developed the risk-related knowledge that defines advanced investment literacy,” said Andrea Sticha, Stanford’s research director.

One finding challenged the assumption that greater knowledge consistently reduces vulnerability. Asked about an opportunity promising a guaranteed, risk-free 25% annual return for five years, 54% of basic-only investors expressed willingness to invest.

That compared with 49% of low-literacy investors and 35% of advanced investors. The results suggest confidence can outpace risk understanding, although the exercise measured stated interest rather than actual fraud losses.

Information sources also differed. Among low-literacy investors, 74% relied on friends, family or colleagues, versus 51% of advanced investors. Social media recommendations attracted 43% of the low-literacy group, compared with 13% of advanced investors.

After accounting for demographic differences, advanced investors were nine percentage points more likely to have planned for retirement and eight points more likely to have emergency savings. They were 15 points less likely to report costly credit card behaviors.

The findings establish associations, not proof that greater knowledge caused better outcomes. Researchers emphasized education extending beyond basic terminology, with risk assessment and fraud recognition addressed directly rather than assumed to follow automatically from familiarity with financial concepts alone.