Gender Differences in Perception of Spending and Financial Risk Aversion

Previous studies have indicated significant relationships between the spending habits of individuals and those of their parents. However, studies have indicated mixed findings as to whether parents tend to teach differing financial lessons to their children depending upon their child’s gender. Some studies suggest this finding, indicating a dichotomy between the financial behaviors of men versus women while other studies do not replicate this finding. This study attempted to determine whether there was a gender difference between individuals’ perception of spending/saving and their willingness to take on financial risk. The findings indicated that there was a significant difference between how men and women perceived themselves and others as spenders/savers. Additionally, the findings also indicated that women tended to be more financially risk averse than men; however, the difference was not significant. Introduction: Due to the United States’ historically low personal savings rate of 5%, the federal government has been putting more focus on encouraging individuals to save (Guidolin & Jeunesse, 2007). As a result, incentives to increase one’s savings habits have been implemented upon adults across the nation. However, the federal government has put little focus on how an individual forms his or her savings habits. This suggests that instead of focusing on the current adult generation, the government should also focus on the savings habits of America’s children—the country’s next generation. Much of the research indicates that children tend to form their financial habits by merely watching how their parents talk about and make their financial decisions. For example, Webley & Nyhus (2012) confirmed this notion in their study of financial literacy among Dutch young Gender Differences in Perception of Spending and Financial Risk Aversion 3 adults, concluding that an adolescent’s conception of their financial future was determined by the future orientation of their parents. Additionally, Hibbert, Beutler, & Martin (2004) found that a young adult whose parents illustrated prudent financial behaviors (paying their bills on time and living within a budget) was less likely to accumulate high levels of debt and demonstrated more concern over funding their expenditures. These findings align with Social Learning Theory, which proposes that one’s behaviors and attitudes are molded by the significant individuals in a person’s life (Bandura 1971). Thus, a child’s implicit learning of his or her parent’s spending habits play a large role in determining his or her financial practices; however, parents’ explicit teaching of budgeting and saving are also crucial to their children’s development of financial habits. For example, Pliner, Freedman, Abramovitch, & Drake (1996) concluded that children who received an allowance demonstrated more responsible credit usage and were more likely to price products accurately than those who did not receive an allowance. However, other studies indicate that the family context in which the allowance operates is crucial to determining whether it effectively teaches children financial skills and knowledge (Mortimer, Dennehy, Lee & Finch, 1994). For example, Ashby, Schoon, & Webley (2011) found that a child who received an allowance in exchange for doing chores had a stronger understanding of day-to-day financial matters. This may be due to the fact that these children were better able to understand the value of money, given that they only received an allowance in exchange for doing work. Similarly, Lassarre (1996) determined that pocket money played a much stronger educative role when accompanied with family discussions of financial matters. Webley & Nyhus (2011) similarly concluded that receiving an allowance was not significant in determining a child’s economic Gender Differences in Perception of Spending and Financial Risk Aversion 4 behavior; instead, an individual’s financial habits were much more influenced by their parents’ explicit voicing of financial values such as encouraging their child to save for the future. Accordingly, the literature indicates that parents’ implicit and explicit teaching of financial matters is crucial to influencing their child’s economic behavior. However, examining these child-parent interactions more closely, we find that male and female young adults tend to differ in their financial behaviors and perception of money matters. For example, Borden, Lee, Serido & Collins (2008) concluded that male young adults tended to demonstrate a higher level of financial education than their female counterparts. Chen & Volpe (2002) confirmed this finding, reporting that on average, men demonstrate stronger levels of personal finance knowledge than women. Additionally, men have consistently reported themselves as more educated in personal finance than woman have. Chen & Volpe also found that women exhibited a lower level of investment knowledge than men (2002). Thus, these studies indicate that there is an apparent gender difference in how individuals are educated in regards to financial matters. Furthermore, examining the personal finance behavior between men and women, one of the main ways in which a gender distinction can be seen is in the area of financial risk. For example, Watson & McNaughton (2007) found that men’s investment tactics were likely to be riskier than those of women. Powell & Ansic (1997) supported this finding, indicating that women tend to demonstrate less risky financial behavior than men. Therefore, these studies indicate the presence of a definite gender difference between the financial behavior of men and women, which may be caused by differing levels of financial education between males and females. However, it is likely that this gender difference is not only shown in individuals’ behavior, but also within individuals’ perception of saving and spending. For example, Olsen & Gender Differences in Perception of Spending and Financial Risk Aversion 5 Cox (2001) found that female investors tended to more strongly consider potential loss than men did when making investment decisions. Thus, women were more likely to invest in lower risk portfolios than men. Additionally, even with the same financial education and skills, both men and women rated women as considering themselves as less confident than men in their investment strategies (Olsen & Cox, 2011). Women reported having lower levels of financial confidence than men and were more likely than men to attribute their investment success to good luck (Powell & Ansic, 1997). These studies indicate that there is a divergence between men and women’s perception of spending. Furthermore, men and women hold different self-perceptions of themselves as investors. In determining the explanation for this gender difference, many hypotheses point to socialization. As discussed above, Social Learning Theory suggests that individuals form their perception, attitudes, and behavior based upon the influence of significant individuals in their lives (Bandura, 1971). Therefore, it is likely that family interactions are responsible for this gender divergence and thereby families tend to present different attitudes on financial socialization toward sons versus daughters, resulting in this gender divergence in economic behavior and perceptions. In order to gain a further understanding of this possible dichotomy between male’s and female’s financial behaviors, this study aims to determine whether men and women have different perceptions of saving/spending as well as willingness to take on financial risk. If the difference is significant, one can then determine whether gender dissimilarities in family and societal interactions influence male’s and female’s formation of their economic behavior.