Actual and Perceived Financial Sophistication and Wealth Accumulation: The Role of Education and Gender

52 Pages Posted: 29 Jan 2016 Last revised: 28 Feb 2017

Christina E. Bannier

Justus-Liebig-University Giessen

Milena Schwarz

Justus-Liebig University Giessen

Date Written: February 29, 2016

Abstract

This study examines the role of actual and perceived financial sophistication (i.e., financial literacy and confidence) for individuals' wealth accumulation. Using survey data from the German SAVE initiative, we find first of all strong gender- and education-related differences in the distribution of the two variables: Whereas financial literacy rises in formal education, confidence increases in education for men but decreases for women. As a consequence, highlyeducated women become strongly underconfident, while men remain overconfident. We then show that these differences influence wealth accumulation: The positive effect of financial literacy is stronger for women than for men and is increasing in women's education but decreasing in men's. For highly-educated men, however, overconfidence closes this gap by increasing wealth via stronger financial engagement. Interestingly, female underconfidence does not reduce current wealth levels though it weakens future-oriented financial engagement and may thus impair future wealth accumulation.

Keywords: Household finance, behavioral finance, financial sophistication, financial literacy, confidence, wealth, gender, formal education

JEL Classification: D91, G11, D83, J26

Suggested Citation

Bannier, Christina E. and Schwarz, Milena, Actual and Perceived Financial Sophistication and Wealth Accumulation: The Role of Education and Gender (February 29, 2016). CFS Working Paper No. 528. Available at SSRN: https://ssrn.com/abstract=2723860 or http://dx.doi.org/10.2139/ssrn.2723860

Christina E. Bannier (Contact Author)

Justus-Liebig-University Giessen ( email )

Licher Str. 62
Gie├čen, 35394
Germany
+49 641 99 22551 (Phone)

Milena Schwarz

Justus-Liebig University Giessen ( email )

Licher Str. 62
Banking and Finance
Giessen, 35394
Germany

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