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Men: money smart, or just more confident?

Frances Woolley is a professor of economics at Carleton University, where she teaches public finance

Most research on financial literacy finds that women are less financially literate, on average, than men. According to one study using U.S. data, "many women are unfamiliar with even the most basic economic concepts needed to make saving and investment decisions." A new study published by the National Bureau of Economic Research (NBER) concludes that "financial illiteracy is widespread among older Americans, particularly women."

One explanation of these findings is that measures of financial literacy are biased against women. Take, for example, one of the questions used in the NBER study:

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"Do you think that the following statement is true or false? 'Buying a single company stock usually provides a safer return than a stock mutual fund.'"

59 per cent of men surveyed gave the "correct" answer (false) compared to 48 per cent of women. But the men surveyed also chose the wrong answer slightly more often than women did. The big difference between men and women was in the "don't knows." 39 per cent of women opted for "don't know", compared to just 25 per cent of men. Does this mean women are ignorant, or that women have a well-justified concern about high management fees and the possibility of mutual fund mismanagement? Perhaps it just reflects men's greater confidence, and willingness to guess the answer on questionnaires?

My own research with Carole Vincent and Taylor Hui, soon to be published by the Social Research and Demonstration Corporation, finds a similar gender gap in financial literacy in Canada, using a wide range of financial literacy measures. The table at the end of this article, taken from our paper, was created during our analysis of Statistics Canada's Canadian Financial Capabilities Survey. The table is based on responses from people between 25 and 65 who are not yet retired.

The Canadian Financial Capabilities Survey began by measuring people's own subjective assessments of their financial literacy. Respondent were asked: "How would you rate your level of financial knowledge?" "How would you rate yourself on each of the following areas of financial management: .. keeping track of money? ….making ends meet?" …shopping around to get the best financial product such as loans or insurance rates? …staying informed on financial issues?

Respondents rated themselves on a one to four scale, with 1=very good, 2=good, 3=fairly good and 4=not very good. People were considered to have a high rating of their own financial literacy if their average response to these "how good are you" questions was between 1 and 2.5.

Who thinks that they are good at managing their finances? First of all, married or cohabiting men -- 70 per cent give themselves a good rating for financial management. Next on the list is married or cohabiting women -- two-thirds of whom give themselves a good rating. The group least confident about their financial management abilities is single women, with 57 per cent rating themselves as good. Is this just a confidence gap, with men saying that they are good at financial management, even though they are no better than women? Or are men actually better financial managers?

The Canadian Financial Capability Survey also asked respondents directly about their financial practices, with eight yes-no questions about keeping track of financial affairs, engaging in research before making a financial decision, consulting with friends, family or financial professionals, and so on. Anyone who answered "yes" to four or more of the questions was considered to have good financial management skills. On this more objective measure of financial literacy, the difference between men and women was smaller -- indeed the difference between single men and single women completely disappeared. But for people who are married or living together, men are more likely to get a high score on the financial practices measure than women.

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My gut feeling is that the gender financial literacy gap is a combination of three things. First, it's the type of questions surveys use to measure financial literacy -- questions about mutual funds, not about how to cook dinner for four for $10 or less. Second, it's men's greater confidence -- or show of confidence. I believe that it's more socially acceptable for a woman to confess ignorance about financial maters. Third, I think that there are some real gender differences in financial literacy, stemming in part from differences between men's and women's education and work experience, and in part from differences between men's and women's responsibilities for financial management within the family.

But what these differences mean for men's and women's everyday lives -- and what to do about them -- is another question.

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