The Gender Gap in Financial Literacy:  Unpacking Financial Knowledge and Financial Confidence

I am working on an exciting project related to Women’s Financial Wellness (and had a deadline for it, so apologies for the delay in this most recent instalment of Life Lessons).  There will be a future post with more information about the project, but at present, the details are TOP SECRET!

As part of my research for the project, I recently read an academic paper entitled Fearless Woman:  Financial Literacy and Stock Market Participation (Bucher-Koenen et al. 2021).  In the paper, the authors examine the relationship between financial knowledge, financial confidence, and stock market participation.

Key findings of the paper are as follows:

• There is a pronounced gender gap in financial literacy.
• Only 2/3 of the gender gap in financial literacy is explained by lower financial knowledge; the remaining 1/3 is due to lower financial confidence.
• Stock market participation is lower for underconfident respondents.

The authors collected survey data from 1,532 respondents in the Dutch population.  They used the Big Three financial literacy questions, which measure knowledge about basic but fundamental financial concepts:  interest compounding, inflation, and risk diversification. These questions were developed by Annamaria Lusardi and Olivia Mitchell and are the questions most commonly used to measure financial literacy in surveys around the world.

So, just for fun, let’s ask the questions!

1. Interest question:

Suppose you had $100 in a savings account and the interest rate was 2% per year.  After 5 years, how much do you think you would have in the account if you left the money to grow?

1. More than $102
2. Exactly $102
3. Less than $102
4. Do not know
5. Refuse to answer

2. Inflation question:

Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year.  After 1 year, how much would you be able to buy with the money in this account?

1. More than today
2. Exactly the same
3. Less than today
4. Do not know
5. Refuse to answer

3. Risk question:

Please tell me whether this statement is true or false.  “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”

1. True
2. False
3. Do not know
4. Refuse to answer

Did you answer?  Answers to the questions and some insights will be revealed below.

The correct answer to the interest question is 1. more than $102.  At 2% annual interest, $100 will grow to $102 at the end of the first year.  In year 2, the $102 will grow at a rate of 2% and will total $104.04 at the end of second year. Of the survey participants, 91.9% of males got the correct answer, while only 84.4% of females answered correctly. Also of interest, 3.2% of males selected either do not know/refuse to answer, while 7.7% of females selected these responses.

For the inflation question, the correct answer is 3. less than today.  If your savings are only growing at 1% while the cost of goods is increasing by 2%, then your purchasing power will have decreased by the end of the year.  Correct responses were slightly lower on this question.  However, 89.8% of males got the correct answer, while only 80.6% of females answered correctly. More participants also opted not to provide an answer with 4.9% of males selecting either do not know/refuse to answer, and 11.6% of females selecting these responses.

The risk question was the most difficult of the three questions.  The correct answer to the question is 2. false.  Buying a single company’s stock would be considered to be an undiversified investment – all of your eggs in one basket.  A stock mutual fund will invest in many different companies, thus spreading out the risk over a larger number of “eggs.”  This reduces risk, thus providing the “safer return” mentioned in the question.  Correct responses to this question are significantly lower than to the first two questions.  Only 61.9% of males got the correct answer, and only 34.4% of females answered correctly. Strikingly, the do not know/refuse to answer options jumped to 30.6% for males, and 55.6% for females.

The results of the survey confirm a gender gap in financial literacy.  However, this is not the most interesting part of the study!  The authors repeated the survey 6 weeks later, but removed the do not know/refuse to answer options.  Instead, respondents were asked to rank their confidence in their answers to the financial literacy questions on a scale from 1 (not confident) to 7 (completely confident).

Key findings from the second survey:

• When respondents are forced to answer, the gender gap decreases.
• Women are significantly less confident in their answers than men.
• More than 1/3 of the financial literacy gender gap identified in the first survey can be attributed to differences in confidence.
• The central result of the paper is that when it comes to financial literacy, women know less than men, but they know more than they think they know.

The implications of this study are thought-provoking.  Increasing financial knowledge might not be enough to close the financial literacy gender gap if differences in confidence persist between women and men.  Therefore, we must support individuals not only in acquiring financial knowledge but also in instilling confidence in their knowledge.  Small initial differences in confidence might lead to large differences in accumulated financial literacy and financial well-being.

Of concern is that lower levels of confidence can be detrimental to women, particularly in the context of long-term financial decisions such as investment, retirement savings plans, private saving, and wealth accumulation.  And the effect may be exacerbated because women, on average, have a substantially longer life expectancy than men.

Whew!  That was a long one.  It is a challenge to boil down a 57 page academic paper into a blog post.  For a non-academic audience.  I hope that the take-aways were worth the read!

Reference:

Fearless Woman:  Financial Literacy and Stock Market Participation. Bucher-Koenen et al.  (2021). GFLEC Working Paper.