Why Planets Collide When We Talk About Money

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When it comes to money, men really are from Mars and women from Venus, according to an expert panel at the Council for Economic Education. The one thing they have in common: Neither is particularly astute when it comes to managing their finances.

Women tend be slow to act where money is concerned, and they place utmost value on working with an adviser they trust, says Ann Kaplan, a partner at Circle Wealth Management. Men, by contrast, tend to make snap decisions and will work with anyone they believe can earn a higher return.

These predilections reflect the financial confidence levels of the sexes, which are strikingly consistent across different nations, according to research from panelist Annamaria Lusardi, a professor at the George Washington University School of Business and director of the Financial Literacy Center. You might think, then, that the two effectively balance out in most households. The problem, says Lusardi, is that both men and women score failing marks in financial literacy testing.

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Women know what they don’t know and sit on their hands as a result; men, meanwhile, are prone to guessing, says Lusardi. Unfortunately, those shortcomings don’t really “balance” each other out. In her view, women are better suited to manage personal financial issues—if only they’d get enough formal financial education to gain confidence. From Lusardi’s paper:

“Women are not only less likely to answer the financial literacy questions correctly, but they are more likely to state that they do not know the answers, compared to men. This is a systematic and persistent difference in financial literacy between men and women.”

According to the panel, a higher level of general education and higher incomes go hand-in-hand with greater understanding of financial concepts. So does age — before 65, at least, when financial prowess starts to erode. Yet even the well educated demonstrate a woeful lack of knowledge of personal finance issues. In testing, for example, many don’t know that a mutual fund is a safer investment than an individual stock or that if inflation rises faster than investment returns you lose buying power.

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According to Lusardi’s research:

  • Financial illiteracy is widespread, even when financial markets are well developed, as in Germany, the Netherlands, Sweden, Italy, Japan, and New Zealand, or when they are changing rapidly, as in Russia. Low levels of financial literacy are not specific to any country or stage of economic development. Both sexes struggle with money concepts.
  • Direct experience is the best teacher, so in inflation-touched Italy they better understand the effect rising prices have on their buying power; while in Japan, which has had bouts of deflation, fewer answer inflation questions correctly. Likewise, if a country has experienced pension privatization, as in Sweden, they better understand risk diversification. In contrast, Russians and East Germans know less about diversification, having had less exposure to the stock market.

This last point seems to give men a leg up, as they traditionally have had the most experience managing household finances. Not that they’ve managed them well, by and large. But someone has to make a decision.