How Female Confidence Impacts the Gender Gap in Investing
There is a hidden reason for greater financial illiteracy in women!
- Studies show over one-third of the gender gap in financial illiteracy is down to women's lack of confidence in their own financial knowledge, rather than an actual lack of financial knowledge. In other words, women know more about finances than they think they do!
- But even after accounting for the confidence gap, there remains a knowledge gap that needs addressing to achieve investment equality.
- Contrary to popular myth, the lack of knowledge is not down to the “inability” of women to understand finances, but instead the social circumstances that create financial literacy.
We now know that women are behind men in the world of investing and that it is in large part due to the gender gap in financial literacy. We also know the dangers this presents for the long-term financial well-being of women and their families. In short, it's not ideal. But the good news is this doesn't have to spell eternal doom and gloom for women! Read on to find out how female confidence, or the lack thereof, is a major reason for the gender gap and how knowing this can help us close the gap!
Lack of Confidence or a Lack of Knowledge?
It has been established that there is a global difference in financial literacy rates between men and women of about 5%. However, research by leading Dutch economists has revealed the true difference actually to be much smaller than 5%. This is because women would rather leave a question unanswered if unsure of the answer, whilst men would rather take a wild guess! It’s obvious men and women have pretty different levels of self-confidence, but what’s less obvious is how this might skew our perception of the gender gap.
Survey Data From Fearless Woman: Financial Literacy and Stock Market Participation
By Tabea Bucher-Koenen, Rob Alessie, Annamaria Lusardi and Maarten van Rooij
The question: Suppose you put money in the bank for two years and the bank agrees to add 15% per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years?
[more; the same; don’t know; refuse to answer]
The chart shows the percentage of correct responses for the compound interest question, one of three questions in the study.
The first round included a “do not know” multiple choice option, and the second round did not. As shown, there was a greater percentage of women who chose the “do not know” option, and this trend was reflected across all three questions.
During the second round of the study, however, the gender gap shrank from 7.5% to 3.5%, once the “do not know” option got removed. In short, this shows women disproportionately answer “do not know” when asked questions about financial literacy, but when pressed for an answer, they are usually able to give a correct one!
To top it off, when asked to rate their confidence in their answers on a scale of 1 to 7, women averaged a self-rating of 3, and men averaged a rating of 6.5.
Whether this is a problem of women suffering from a lack of confidence, or men suffering from a classic case of over-confidence remains to be seen. But, the fact remains that women are generally more financially literate than commonly believed.
The Dutch economists used the data collected to calculate just how much of the gender gap was caused by a lack of confidence, and it amounted to just over one-third!
A Lack of Knowledge
The confidence gap does not account for the entire gender gap, which means the rest does come down to less financial knowledge in women.
Myth Buster:
The reasons for less financial knowledge in women are not due to the particular characteristics of men and women, but instead to how financial literacy is "produced" in the first place. In other words, financial literacy is a process of nurture, not nature!
Evidence from the RAND American Life Panel reveals the most important factors that produce financial literacy are education, income and marital status.
How Do These Factors Create a Gender Gap?
The greater the income level, the greater the financial literacy, but average income levels for women are 20% lower than that of men.
- The higher the income, the more money there is to look after and the more potential there is for wealth growth.
- This makes people more interested in it, so naturally financial literacy increases.
- Evidence from the American Life Panel supports this theory, as 40 to 50-year-old white males in the upper-income brackets were reported to be the most financially literate demographic.
Women tend to pursue a different education path to men, one that avoids business or economics subjects.
- A survey published by the New York Times in 2016 revealed just 35% of economics majors across the US are female.
- Of course, studying economics is not the only, or even most effective, way to gain financial literacy, but it does indicate where female interests lie.
- In other words, women appear to be simply less interested in learning about finance.
- A European study of school-aged girls conducted by Microsoft claims girls lose interest in STEM subjects by the age of 15; however, before this age, their performance does not reveal them to be any worse than boys in STEM.
- So, gender norms probably motivate the inclinations of women instead of their actual abilities.
The presence of gender stereotypes affects female financial literacy.
- Finance is traditionally a male-dominated area. Women see this and are subconsciously influenced.
- A New York Times survey revealed college-aged women are 10% less interested in “finance-related topics” than men.
- This spills over into households, where men proportionally assume greater responsibility for financial decision making.
- The RAND American Life Panel recorded divorced women as having amongst the lowest rates of financial literacy in the whole population.
- It would take them an average of 13.7 years to reach the same level of financial literacy as women who have never been married.
Conclusion
So, although confidence is a huge factor in the existence of the gender gap, it doesn’t account for all of it! There’s still a long way to go in closing the actual knowledge gap, but the good news is there has been progress over the years. As with confidence, steps are currently being taken to close the gender gap in financial literacy and, ultimately, investment and wealth.
CONFIDENCE IN FINANCIAL LITERACY. COMPLETED. ✅
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