Saturday, May 9, 2009

Women and Finance

Tomorrow is Mother’s Day and I want to celebrate it by writing about women. As I have documented in previous posts, there is a substantial gender difference between women and men when it comes to financial literacy: women know much less about economics and finance than men. This is true not only among older cohorts but also among younger generations. Moreover, it holds true in many of the countries in which I have studied financial literacy, including Italy, Germany, the Netherlands, and Ireland. This is not good news for anyone because women often have to fend for themselves in an increasingly complex financial world: the divorce rate is much higher than in the past, single motherhood is very high in certain demographic groups, and greater longevity for women calls for more retirement savings for women than for men. And women may be most concerned about children’s education and how to help aging parents. Being a financially savvy woman involves making difficult decisions that have important financial implications.

Despite grim statistics about financial literacy among women, in my view, the evidence about how women fare in financial decision making is far from unfavorable. Research shows that women who hold stocks trade them less frequently than men, thereby paying fewer fees and transaction costs and ending up with more wealth. Women tend to hold more conservative portfolios, and in the current environment this has worked out well. Women are also less likely to be victims of scams that seem to be disproportionately perpetrated against white men.

One reason that women might be better financial decision makers, despite displaying, in general, lower literacy than men, is that women know what they do not know. In studies of financial literacy in which participants were asked to rank their level of financial knowledge prior to being given a set of problems to measure their actual level of financial literacy, women’s low self-evaluations were fairly consistently correlated with fair to poor performance on the literacy problems. This demonstrated lack of overconfidence may prove helpful in financial decision making and in avoiding financial mistakes, and this awareness may help women to take action. As several studies about financial education show, seminars and education programs are disproportionately attended by female participants. Moreover, it is primarily women who report being affected by those programs.

A project I did here at Dartmouth College confirmed many of the findings of larger surveys and data sets. The women I interviewed consistently spoke of finance with humility and considered themselves unsophisticated investors. Yet I was struck by how articulate women were in describing their financial needs, how much they had thought about financial matters, and not only how much they cared about the financial security of their loved ones but also the provisions they made to that end.

In my view, finance is an ideal field for women. The fact that women make decisions with the well being of others in mind, that they steer clear of excessive risk, and that they do not consider themselves “financial geniuses” and “financial wizards” are characteristics that have not been fully exploited. Interestingly, women are often brought in when there is a financial crisis and confidence needs to be restored. For example, after a less than spotless record, the Securities and Exchange Commission is now headed by a woman, and its Office of Investor Education and Advocacy is also headed by a woman. Perhaps one of the ways to ensure the smooth functioning of financial institutions and contracts is to have more women in charge.

On a personal note, my mother taught me a lot about finance, and so in my family, the passion for this topic has been transmitted from mother to daughter. Happy Mother’s Day!