Financial Knowledge: Is the Gender Gap Real?

Financial knowledge has been linked to wealth accumulation and financial stability, with scholars devoting increasing effort to study individuals’ financial knowledge and its determinants. One determinant of financial knowledge levels is gender. Studies have consistently shown women score lower than men on financial knowledge measures, which are often constructed by summing respondent’s correct answers on a series of factual items and collapsing incorrect answers and “don’t know” (DK) response into a single absence-of knowledge category. However, it is possible that DK response and incorrect answers do not equally reflect ignorance about financial matters, and by collapsing them into one category researchers may compromise measurement validity. This study aims to disentangle DK responses and incorrect answers and to explore how these two disparate responses affect the gender gap in financial knowledge.

Using 2012 National Financial Capability Studies (NFCS) state-by-state data, we examine the gender difference in responding with correct, incorrect, and DK responses to a 5-item financial knowledge scale. The NFCS is a large national survey of U.S. adults and households, and its state-by-state survey was conducted in 2012 among a nationally-representative sample of 25,509 American adults. The financial knowledge scale is composed of five factual questions concerning knowledge about compound interest, inflation, bond price, mortgage payment, and financial risk. Questions are in a multiple-choice format, and each has one correct answer, two incorrect answers, a DK answer, and “prefer not to say” answer. We employed grouped-data multinomial logistic regression to examine gender difference in choosing DK response and incorrect answers, relative to answering with a correct answer.

Results show that, controlling other socio-demographic variables, females were more likely than males to have incorrect answers on all five questions: compound interest (β=.45, p<.001), inflation (β=.44, p<.001), bond price (β=.19, p<.001), mortgage payment (β=.16, p<.001), and financial risk (β=.26, p<.001). Results also show that females are more likely to respond DK than males across all five questions: compound interest (β=.49, p<.001), inflation (β=.89, p<.001), bond price (β=.81, p<.001), mortgage payment (β=.43, p<.001), and financial risk question (β=.83, p<.001). The variance in coefficient magnitude is systematic: in all five questions, with the gender coefficients for DK responses larger than those for incorrect answers.

Our study challenges the conventional measures of financial literacy by demonstrating the gender disparity in DK response and incorrect answers. The findings suggest that women’s financial knowledge can be substantially higher than most studies have shown, and the gender gap may not be as large as it seems. In addition, gender disparity in choosing incorrect answers appears domain-specific, with relatively big impact on compound interest and inflation questions, and small impact on bond price, mortgage payment, and financial risk questions. Our study demonstrates that financial literacy measures are capturing not just knowledge, but other things (such as risk propensity, self-confidence). To measure financial knowledge precisely, future research should consider constructing measures that discourage DK response.