Women and Financial Literacy. Its Measurement Method and Outcomes

Table of Contents

List of Abbreviations

1. Introduction
2. Financial Literacy
2.1 Measuring financial literacy
2.2 Critique on measurement methods
2.3 Outcome

3. Gender Differences
3.1 Subgroups affected by gender difference
3.2 Factors explaining gender difference
3.3 Gender stereotypes
3.3.1 Society
3.3.2 Family
3.3.3 Ancient institutions

4. Policy Responses
4.1 Initiatives supporting financial literacy among women
4.2 Alternatives
4.3 Critique on current financial education programs

5. Conclusion

References III

Abstract

Data from different household and health surveys revealed that the level of finan- cial literacy is low worldwide. Particularly regarding the gender effect, this find- ing is concerning. Women tend to be less sophisticated in financial matters than men, whilst facing more demographic and economic barriers. Despite the effort to measure financial literacy, there is no consensus on the sources of gender differ- ences. This suggests that, although policy makers and economies mount initiatives in order to enhance financial literacy among women around the world, research regarding factors affecting women’s financial education and attitude towards fi- nancial literacy is still in its infancy. In addition, to date little evidence is given on their efficacy of those new established financial education programs.

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

In times of economic and demographic change, personal financial literacy is cru- cial in everyday life decisions and future planning. Since several countries changed their pension schemes from traditional defined benefit pensions to indi- vidual-account contribution schemes and financial instruments become more and more complex, individuals have been confronted with decision makings over sav- ings, investments and consumption on their own, bearing the risk of wrong in- vestment choices and bad liquidity management leading to an insecure financial future (Lusardi and Mitchell, 2011:1). Overall and regardless of the country’s economic development and pension scheme, the level of knowledge on financial matter referred to as financial literacy is suggested to be very low around the world (Lusardi and Mitchell, 2011:13; Xu and Zia, 2012:7-8).

Financial literacy is defined as “a combination of awareness, knowledge, skill, at- titude and behavior necessary to make sound financial decisions and ultimately achieve individual financial wellbeing.” (Hung et al., 2012:8). Empirical evidence show that is has a positive impact on financial behavior and financial status, such as wealth accumulation (Stango and Zinman, 2009), stock market participation (van Rooij et al., 2011; Yoong, 2011), and retirement planning (Lusardi and Mitchell, 2008). Research suggests that people being financially illiterate may easier engage in high-cost credit card borrowings and are more likely to be in high-cost debt, for example (Lusardi and de Bassa Scheresberg, 2013:1; Lusardi and Tufano, 2009).

Financial literacy differs across age, ethnicity and gender. Particularly the gender effect is concerning. Despite strides in education and in the workplace, women are still less sophisticated in finance matters than men. Nowadays the risk to be solely responsible for own financial needs is more likely to women than in the past. There is evidence for high divorce rates and single motherhoods in certain demo- graphic fields (Cliquet, 2003). In addition, research suggests that widowed women are more likely to live in poverty (Anzick and Weaver, 2001). Thus a lower level of financial literacy hampers women’s abilities to accumulate wealth, manage as- sets and secure a promising financial future.

As a consequence, several initiatives by governmental or financial institutions es- tablish financial education policies or programs, which aim to increase women’s financial literacy. Although women tend to enjoy investing less than men (Hira and Loibl, 2007), studies reveal that they may be better investors than men, since females are less prone to risky behavior, for instance (Harris et al., 2006). Finan- cial literacy may therefore be needed in personal financial decisions as well as in work-related situations.

The purpose of this paper is to explain financial literacy, its measurement method and outcomes, particularly with respect to gender. Next, we analyze the gender gap by scrutinizing current research on this topic. Finally, we examine current initiatives providing help to women in need of financial education.

2. Financial Literacy

The severe consequences of the current financial crisis have reaffirmed the great lag in financial knowledge. Next to the economic change, there is the demograph- ic barrier, which imposes risk on every individual. Therefore, individuals need to understand and take corresponding measures on financial information best.

2.1 Measuring financial literacy

Many research teams brought up surveys measuring financial literacy, but only a few show results on an international level. For example, Annamaria Lusardi and her team provided simple and brief questions, which are characterized as bench- marks in measurements of financial literacy. With three questions covering basic methods of savings and portfolio choice included first in the 2004 Health and Re- tirement Study and in several others later on, financial literacy has been measured on a national level first. In collaboration with several other teams, Lusardi drew conclusions on the international level due to assessing well-adapted questions from international surveys covering the topic of financial capability.

These questions follow four key principles (Lusardi and Mitchell, 2011:2).

1) Simplicity. Questions are designed to measure basic financial concepts only.

2) Relevance. Questions need to relate to an individual’s day-to-day financial decisions, but still be general.

3) Brevity. Number of questions needs to be kept to a minimum to ensure a widespread adoption in surveys.

4) Capacity to differentiate. Questions are specially designed to differentiate between knowledge levels.

These questions included in several surveys are as follows (Lusardi and Mitchell, 2011:3):

1) 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?

2) Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After one year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?

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

The first question requires an elementary calculation related to compounding of interest rates. The second measures understanding of inflation, whereas the third question tests the knowledge of risk diversification. In addition, the list of possible answers includes the indication on not knowing the answer and refusing to answer in general, to “make it easier for people simply to select a preferred response (Lu- sardi and Mitchel, 2011:4). All measures are based on financial knowledge only.

2.2 Critique on measurement methods

Despite the cost and effort, the outcomes may be covered by measurement errors. Lusardi concludes: “On the one hand, people may simply guess the answers at random, and on the other hand people may misunderstand questions” (Lusardi and Mitchell, 2011:6). Though questions with similar wording have been compared, differences will remain, next to measurement errors. Therefore cross-national comparisons should be made with caution (Hung et al., 2012:13). Same thoughts apply to the OECD 2005 report, which provides an overview on financial literacy on a global level, but since those questions vary from country to country, it is not possible to compare them cross-national (Lusardi and Mitchell, 2011:5).

2.3 Outcome

Financial literacy scores are measured to be low around the world and with regard to gender women score lower than men. The gender effect is concerning because women face higher financial challenges than men: Living on average five years longer than men (Møller, Fincher et al., 2009), they need to accumulate more sav- ing for their retirement and will be confronted with higher healthcare expenses than men over the course of their lives, whilst having lower social security pay- ments due to less time in the workforce. In addition, it is expected that some day due to their husbands’ death or divorce, the majority of women will be solely responsible for their financial needs (Davidson et al., 2012:1).

3. Gender Differences

Today women represent more than 40 percent of the global labor force, more than half of the world’s university students (World Bank, 2012:3) and amount to 17.6% of executive officers in the finance and insurance industries (Soares et al., 2013). Nevertheless, the gender issue is prevalent in financial literacy measurements stating that women know less than men when it comes to personal and household finance decision-making, however, only little information is given on the factors that contribute to the gender difference.

3.1 Subgroups affected by gender difference

There is evidence found in literature describing disparities within a larger popula- tion of women. Elderly women, young women and married women display differ- ent levels in financial literacy. The 2004 and 2008 HRS shows that in the US el- derly women over 50 have significantly lower financial literacy than men (Lusardi and Mitchell, 2008). Such evidence can also be found in Australia for women aged 70+ (ANZ Banking Group, 2008). In the US, young women at college un- derperform when it comes to general knowledge, savings and borrowings, and in- surance and investment decisions (Chen and Volpe, 2002). In Canada, young women were less likely to save, spend the money according to their budget and be responsible for their day-to-day finance matters than men of the same age (Finan- cial Consumer Agency of Canada, 2008). The OECD reports to collect more data on youth with the help of PISA tests (Hung et al., 2012:22). Finally, women are affected by life events related to family status: By divorce or by death, losing hus- bands is hazardous to women's financial health regarding reduced household in- comes, housing issues or becoming a lone parent. Furthermore, women’s savings and debt levels as well are more subject to life events like childbirth, divorce or widowhood than men’s (Westaway and McKay, 2007).

3.2 Factors explaining gender difference

If we define financial literacy based on numerical and arithmetic knowledge only, research suggests that there is no gender gap in understanding of mathematical concepts (Mulls et al., 2008; Hyde and Linn, 2006). But this approach is limited to a certain age only. Overall, we see different levels of financial literacy across age and gender and different approaches on explaining them.

First, differences in knowledge level are caused by schooling and financial educa- tion. Research on PISA scores among students in 55 countries shows that a link between educational backgrounds, results in PISA tests and financial literacy ex- ists (Japelli, 2010). This approach is not representative, since, in developing coun- tries for instance, many girls receive less education than boys (Glick, 2011), or are discriminated in their access to education (Simmons and Supri ,1999).

Secondly, another approach states that the difference is not caused by characteris- tics of men and women but by how literacy is produced. If men specialize in mak- ing household financial decisions, they acquire financial knowledge, whereas women as a consequence specialize in other household functions. Despite the fact that there is little evidence for the link between decision-making and gender, cou- ples’ decision-making depends on the relative education of spouses. “Women and men with similar education relative to their partner on average take on the same number of financial responsibilities, and both men and women are responsible for more financial activities as their education increases relative to their spouse,” Raquel Fonseca argues. They expect gender equality with regard to equal educa- tion achievements soon, but her findings state little about the intensity of decision- making and level of financial literacy (Fonseca et al., 2012). Others conclude that there is evidence that divorced women have less financial knowledge than women who never married showing the importance of intra-household specializations (Zissimopoulos, Karney et al., 2008). The reasons for women to take a non- finance related role in the household could be traced back to earlier days’ gender stereotypes.

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