Life After Full-time Work Blog

And the best advice we were ever given!

[Two blog posts ago I featured an edited version of a part of the interview I conducted with Dr Annamaria Lusardi on financial literacy in 2021. Now I continue with a thought prompted by the observation that fewer women participate in the stock market than men. And, as before, square brackets indicate my personal observations that were not part of the interview.]

Don: One more question, about the stock market participation of women. I’ve read that financial literacy among women is lower than among men. So, talk a little bit about this.

Anna: I’m so glad you asked this question, because we [meaning Anna and Dr Olivia Mitchell] have spent many years looking into this topic, in particular the gender difference in financial literacy. And I have to say, strikingly, there’s a gender difference in financial literacy around the world. And this has consequences when we look at the ways in which financial literacy matters and in particular when we look at one important behavior that people identify with finance.

People identify finance with investing in the stock market. So in our recent paper we try to understand whether financial literacy affects stock market participation. And I have to say, it really does. It’s important because if women do not have enough financial literacy, they are going to be held back, they are not going to participate in the financial markets, in the stock market in particular, and that’s an important way to build wealth.

And we wanted to understand this a little deeper as well, which is: what explains this gender gap, why do women know less than men? I think we all realize that we all need these skills. And when we looked deeper at the way in which women answer questions, we realized that they disproportionately answer the financial literacy questions not incorrectly, but disproportionately with “I do not know.”

And then we looked deeper into this “I do not know” area and realized it is a symptom of a lack of confidence. We could even measure how much of that gender gap was a difference in knowledge, and how much was a difference in confidence. We estimated that a third of the gender gap in financial literacy is confidence. And when we looked at the participation in the stock market we saw that both characteristics – women have not only lower knowledge but also lower confidence – matter for their participation in the stock market.

And so I believe that what the US did, which is put a statue of a little girl in front of the New York Stock Exchange, is indeed a good idea. So in case people do not know, there is a Fearless Girl, it’s a little statue that was put in front of the Charging Bull in New York City. And now the little girl is in front of the New York Stock Exchange. And I think that symbol is absolutely right, that we need to encourage women and girls to be fearless. [When I last checked, the future location of the statue was uncertain.]

[One aspect I didn’t know then, but have subsequently discovered, is that women tend actually to be better investors than men, in terms of outperformance, more diversified portfolios, and greater risk awareness.]

Don: I remember seeing that photograph when the statue of the girl was first placed there, and I remember thinking: this is just wonderful, in so many ways it’s the perfect picture.

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Don: Is there anything you want to add, that we haven’t dealt with?

Anna: Thank you. I want to speak about a topic which I think has been very clear during the [Covid] crisis, and which is inequality. I think the crisis has not just shown how unequal we are when it comes to dealing with a shock of this proportion, but it has left us even more unequal than when we were hit by this crisis. And so this is more than ever a time to do work, and in particular to help the groups which are more vulnerable.

Another piece of research that I want to show, and this was done before the financial crisis, it was just to show also the extent to which financial literacy can be linked to inequality.

I really do think that moving forward we need to democratize knowledge, we need to democratize financial literacy. It shouldn’t just be concentrated in a small group of people who are privileged. This is what happens when you don’t put it in schools, you don’t make it available to everybody.

It’s often only the affluent families – college-educated white families – who will just provide that information to their male children. And so, such a large group of society is going to be left behind. And not being financially literate today is a major disadvantage.

One of the things we have documented is that financial literacy acted as a shield to protect people a little bit more against being hit by the shocks of this financial crisis. So it doesn’t just help people navigate in the world around them, it also helps them to be better protected, and it helps them be less unequal. Because being able to manage your wealth has so many benefits – and everybody should be able to share and enjoy those benefits.

Don: Yes, and if we had this we would not only have greater equality financially, we’d have greater emotional security too.

***

Don: You have given us all terrific wisdom and advice. What’s the best piece of advice you were ever given?

Anna: The best piece of advice that I was given, that I would also give to others, is: Don’t waste time.

Time is truly money. And what I mean here is that it’s very important in finance to start early.

I tell my students that when they sleep, interest compounding is at work, and that they should start as early as possible. This is how you accumulate wealth, starting as early as possible. Use time well.

And this is important because we all have this resource, time. And young people are very rich with this resource. And so that’s why we have to use our time well.

So my first recommendation is: use the time to start early. But also use the time well in the sense of taking good care of your finances. Spend a little bit of time. It doesn’t take a lot of time to take care of your finances, in the same way in which you take care of your health, you take care of your children, maybe you take care of your garden, you take care of your car. Your finances need constant attention.

Just spend ten minutes a week taking care of your finances, and you’ll do better, you’ll be more financially secure, you’ll be more financially confident. Time is really important and we need to spend it well. So those would be my suggestions.

***

Anna: But then I also want to know: you are another big expert in this field. So, Don, let me ask this question too, because I also know that’s what people would like to hear.

Don: I asked my wife, who knows me better than I know myself, and who is really the bright one in the family. And I said: if I ask you, what are the rules and advice that I live by?

She said: it’s not on the financial side. She said: both of us do something you keep talking about. And she reminded me that it’s a little saying, that rhymes. It’s:

We give our kids two precious things:
One is roots; the other, wings.

And I remember when I first heard that, thinking: giving our kids roots will be easy, giving them wings will be difficult! But part of giving them wings, it seems to me, is giving them the ability to fly: an education that includes the financial side is just so important.

[To my great surprise, I received numerous comments thanking me for saying this. It really seems to have resonated with our audience.]

Anna, this has been an absolute pleasure. It’s been such a long time since we’ve talked! I’ve thoroughly enjoyed this. I know our audience will. And I hope we’ll see you on October 12 – 14 at The Hague, at the P&I World Pension Summit. [This was in 2021. The 2026 version takes place in The Hague on November 4-5.] Thank you, thank you, thank you!

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Takeaway

Part of the gender gap in financial literacy reflects less financial knowledge among women than among men (partly because affluent families pass information down to male children); a noticeable part also reflects the fact that women have less confidence. Despite this, they tend to be better investors than men. Anna’s advice: time is a valuable resource; start using it early. My motto: give your children roots, and then wings (including an education that includes the financial side).

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