Men are from Mars, women are from Venus, right? Maybe, but when it comes to personal finance, maybe the gender gap isn’t as big as people think.
We put men and women to the test to rate their perceived and actual knowledge of personal finance. Self-perceived knowledge of finance is what comes across in standard financial advisor questionnaires. For us, rating the perception of knowledge includes variables like presentation skills of finance, ability to tell a story or entertaining the ability to explain financial concepts. “Actual” knowledge is rated by capability and skill.
For each investor, accounting for gender and age, we computed the gap between the perceived and actual knowledge. This, we call the “confidence” factor. Anyone who believes more highly in their financial knowledge than what comes across in the actual knowledge test is rated “over-confident.” Alternatively, those who underestimate their knowledge are the “under-confident.”
The results may come as a bit of a surprise. We found that men are very confident in their financial knowledge, while women are much less confident. In other words, men have a lower actual knowledge score than anticipated and women have a higher actual knowledge score.
Check out the numbers: The median woman rates her knowledge lower than 76% of men, but in actuality she outscores 38% of them. The difference in knowledge between the sexes is only one-third of what it is believed to be. This study clearly illustrates men and women’s personal finance understanding is more alike than they think!
Look deeper at the investors’ confidence. In many ways confidence is a good thing. If these less confident women knew how they actually stacked up against their peers, maybe they’d be more willing to make riskier trades or bigger financial decisions that will pay off in the long run. But confidence can also be a killer. These terribly confident men may be a bit trigger happy, meaning they trade more heavily and make quick decisions with less planning.
Keep in mind that we’re talking about averages. Understanding investors goes well beyond their gender, and there are less confident men just as there are overly confident women. But it’s clear that the subjective questions of standard risk tolerance questionnaires likely won’t tell an accurate story. Clients may even try to game the system to get the results they want, or think they should want. For instance, a question asking “how risk-seeking are you?” may elicit a response from investors thinking about the stock market and how they think their portfolio should look. Perception is often different than reality, and that’s not always a good thing.
Fortunately, we don’t have to rely on a handful of check-the-box questions to better understand investors. Today’s technology has created a suite of products available for financial advisors to look further than the basic boxes of gender, age, and retirement date. To be a smart entrepreneur and provide clients a true value addition, financial advisors need to understand a deeper level of behavioral data. Technology provides a more detailed picture for advisors, making them better meet their fiduciary responsibilities.
Using behavioral tests highlights opportunities for coaching clients and filling in gaps, like increasing a female investor’s confidence and showing her how she stacks up against her peers. Unsurprisingly, investor confidence is linked to other attributes, like an aversion to risk and loss. Regardless of gender, increased wealth increases risk appetite and reduces loss aversion.
Financial advisors must be prepared to piece together these investor puzzles. After all, one cannot be judged by demographic stereotypes alone.