Does financial literacy translate to better financial behavior?

I recently ran across some research conducted by Market Strategies International, that showed a very interesting result: Millennial women report significantly lower confidence in their financial literacy than did millennial men; but when tested, they performed significantly better than did their male counterparts. What gives? And what are the implications?

First, some background:

  • In the study, survey respondents were asked how well they felt they understood financial and insurance-related terms. Part one of the puzzle: Only 24% of millennial women reported that they “completely understand” financial and insurance terms while 34% of millennial men claimed complete understanding. This meant that men were ~40% more likely to report that they completely understand these terms.
  • Part two is where things get interesting: When these respondents’ actual knowledge was put to test by asking the respondents to match financial terms to their definitions, the picture changed quite starkly: 33% of millennial women performed the matches correctly, compared to only 14% of men. Said differently, women were 140% more likely than men to correctly define financial terms, despite being significantly less likely to consider themselves financially literate.

Translation: Millennial women seem to have a significant financial self-confidence problem.

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The implications of this research are quite concerning. On the one hand, it’s definitely great news that millennial women are showing clear evidence of greater financial literacy.

However, if they are this literate, but grossly underestimate their own knowledge and competence, isn’t it more likely that they’ll risk suppressing their own superior knowledge in favor of potentially less sound advice given by others who may not be as competent?

This is in fact already happening.

In a different study, UBS Wealth Management found that millennial women are the most willing to leave investing and financial planning decisions to their husbands, with 61% more likely to leave major financial decisions to their spouse, more than any previous generation.

This is terrible news for their financial security and prosperity long-term: Not only do they seem to be not taking taking their financial destiny into their own hands, they may actually be shooting themselves in the foot by handing it over to potentially less competent mates, rather than taking an active role in decision-making.

Why is this the case? There are probably many complex and interrelated causes, beyond the scope of this piece. But the stereotyped media portrayal of the financial characteristics of women as I talk about here, is certainly a  contributing factor.

More importantly, what is to be done?

From the point of millennial (and other) women themselves, this buttresses the case for their taking a more active and informed role in managing the finances most affecting their futures (whether individually, or as part of families). If self-confidence is a barrier to doing that, a baby-steps approach, that gradually increases the scope of their decision-making, is likely to balance their initial low confidence with their higher literacy, quickly bridging the gap.

From the industry’s standpoint, the findings would seem to support providers in every vertical making a more sustained effort to directly reach and market to these women in ways that subtly and overtly support their literacy and ability to make informed financial decisions that best serve their own interests. Highlighting results like the ones above, will help make them more active buyers and participants, and can only benefit both themselves, and open up greater portions of the market to providers.

Photo by Fabian Blank

Last but not the least, there is definitely a role for newcomers to carve out a niche with new value propositions. In my research so far, I have uncovered at least one profitable player, The Financial Diet, that squarely targets this segment with a strong message. Based on accounts I have read by one of the founders, TFD appears to already be profitable, although I have not seen their actual financial results (the company is privately owned). This demonstrates that there’s certainly value to be captured in this market. The key questions will be by whom, at what scale, and with what kinds of value propositions.

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One Thought to “Does financial literacy translate to better financial behavior?”

  1. […] financial lives is their low level of self-confidence. As an example, see my earlier posts here and here. And yet, does it really matter for the “hard stuff”, i.e., real financial […]

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