Empowering women

Today is International Women’s Day and I want to write a blog about a topic that has occupied a lot of my research in the past few years: gender differences in financial literacy. Starting from the very first paper I wrote on financial literacy, I found over and over that women were less likely to answer correctly to financial literacy questions. I did not focus on that finding until more recently, when I performed an international comparison of financial literacy. I found the same finding in as many as eight countries: women were less likely to answer correctly to the same financial literacy questions I had asked in the United States. And strikingly, in countries as different as Sweden, Italy, Japan, Russia, the Netherlands, New Zealand, and Germany, women answered in the same way to the financial literacy questions: they said they “did not know” the answer to the questions (the paper is posted on-line at: http://www.financialliteracyfocus.org/alusardi/Papers/FLAT/FLat_World.pdf).

I remember sitting in front of my computer and looking at the papers that became part of a special issue of the Journal of Pension Economics and Financeand comparing the tables across so many countries. It was so clear, so stunning, so evident; yet I had not seen when I considered the data from one country only. It took that comparison, which was done for a completely different set of reasons, to unveil that striking gender difference in financial literacy.

The finding can be interpreted in different ways and this is what my current research is exploring. First, women may simply be aware of their lack of knowledge and they are willing to admit it. This is consistent with some of my other data that show that women tend to give themselves low rating when assessing their financial knowledge. So, women know that “they do not know.” This may, in fact, be the first step to acquire or want to acquire knowledge. Second, women may have financial knowledge but are less confident in their knowledge and are less willing to guess or choose an answer when they are not sure it is the correct one. Some may view this attitude as a drawback, but I see it as a potential advantage. It takes gut to admit one does not know or does not know enough. Humility in the world of finance may give better results than being bold, assertive, and.. well wrong. In case you did not notice, we have experienced a lot of that in the past few years. Third, women may be less comfortable with the jargon that is used in finance. We assume that people know the technical financial terms, few bother to explain them, but most people do not have a clue about what inflation, real interest rates, and risk even mean, and women are willing to say “I do not know.”

What makes this result so important is that women may be the ideal target for financial education programs. Why attend such a program when one thinks he/she knows (according to my findings, only one third of the population has a very basic knowledge of financial literacy; believe me, that program is so much needed!). Many studies have found that women are not only more likely to attend financial education programs (in the program that I myself run, the large majority of participants were women), but women are also more likely to change their behavior after attending the program.

In summary, empowering women with the financial knowledge, the confidence, the terms that are used in finance could be a powerful tool; women may willing to use it. Happy International Women’s Day.

Vote for financial education

The Economist posted a recent “Where Do you Stand?” feature that goes like this:

Here is a question: Suppose you had $100 in a savings account that paid an interest rate of 2% a year. If you leave the money in the account, how much would you have accumulated after five years: more than $102, exactly $102, or less than $102. . . . A survey found that only half of Americans aged over 50 gave the correct answer. . . .  The solution seems obvious: provide more financial education. . . . A survey by the Federal Reserve Bank of Cleveland reported that: 'Unfortunately, we do not find conclusive evidence that, in general, financial education programmes do lead to greater financial knowledge and ultimately to better financial behaviour.'  So should we give up on financial education? Please vote.

A friend had forwarded me the link to this feature (http://www.economist.com/economist-asks/should-we-give-up-financial-education), and when I read it, I had a good laugh. What a way to frame a question: Here is some medicine that does not work. Would you take it? Please vote, because we are really interested in publishing your opinion.

I was nevertheless very pleased with the feature. The question that was cited was one that I designed (with Olivia Mitchell) for the Health and Retirement Study, a US survey that covers respondents 50 and older. However, it appears that whoever authored the feature forgot to read my paper because the statistic that is reported is, in fact, wrong. Not half but 67% of older Americans gave the correct answer. This does not mean that financial literacy is high. Nevertheless, it is good to check sources.
I went and searched for the Federal Reserve Bank of Cleveland survey to check it out. The link to the survey report is noted below. I mean this in a friendly way, but it’s worth noting that the Economist’s citation is from an unpublished paper written five years ago and covering only a handful of financial education programs. While the title of the paper may look attractive, I am not sure I would consider it the authoritative source on financial education. (I Googled the authors and it appears they have not written any other papers on this topic nor published that paper.) There are more recent and published papers, some of them pointing to the same result. I would have quoted those.

I voted, of course. (In case you want to know, I voted that we should not give up on financial education; I have read a lot more papers on financial education than the one reported here.) After casting my vote, I was able to see percentage of votes in favor of and opposing financial education. Even before seeing the result, however, I could have made an educated guess as to the outcome. The ING Financial Competence Survey asked “Do you think financial education should be taught in school?” In all of the 11 countries that were surveyed, about 90% of respondents answered yes (the report’s link is noted below). Notably the UK ranked second, with 94% of respondents answering yes. After I voted on the Economist’s question, I could see that 84% had voted in favor of financial education.

By the way, methodologically it is not very useful to ask about choices without mentioning costs. Decisions depend both on preferences and budget constraints. Would I give up cable? No. Would I give up a land-line phone? No. Would I give up on financial education? No. Why should we give up on anything without knowing the costs of doing so? We cannot learn much from asking these types of questions. It is Economics 101. 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1118485
http://www.ezonomics.com/ing_international_survey/financial_competence/

A tribute to Ray Lewis

Tomorrow will likely be the last game where we will see Ray Lewis play, the unforgettable number 52, who sometimes seems to fly. Even for a person like me, born and raised in Italy, with little knowledge of American football until some years ago, Ray Lewis represents what is special about the game.
 

Ray Lewis has been considered one of the best defense players, a linebacker who can put up an insurmountable barrier for the rival team, who can tackle like no one else. Watching him play, you forget he is often one of the oldest players on the field, as his age is not apparent from the way he runs, jumps, and catches. But perhaps because he has played for so many years, he knows spectators are there to see a good game, and he makes the game special. On the field, he dances, he screams, he prays, but in particular, he gives it his all.

What is special about Ray Lewis is not just his talent, but his passion, his motivation, his iron will. We have seen him motivate the Ravens before a game and console them after a loss. We can hear his screams when he comes onto the field, when he goes back into the locker room. We can hear the passion in his voice.

What I like the most about Ray is the message he has been delivering throughout the years. You want success? You have to work hard, very hard. You have to stay focused; do not take your eye off what you are doing. You have got to practice, get better every day. And most importantly, do not give up, never give up.

It is a message I like to tell my students (including the MBAs), my nieces (even if they do not play football), and, sometimes, myself, too. It turns out that Ray Lewis is also passionate about financial literacy, and about promoting financial literacy among underprivileged children.  Imagine combining passion with knowledge: what a combination that would be!

But tomorrow is a big game, an ending game, it is Super Bowl. Good luck tomorrow, and thank you, Ray Lewis!