Gender- and Education-Related Effects of Financial Sophistication on Wealth Accumulation : Evidence from Heteroscedasticity-Based Instruments

This study examines two dimensions of financial sophistication, actual and perceived, (i.e., financial literacy and confidence) and their effects on financial wealth accumulation. We employ a novel identification strategy introduced by Lewbel (2012) which utilizes a heteroscedastic covariance restriction to construct instrumental variables. This allows us to estimate causal effects in a setting where conventional instruments are frequently weak and unlikely to satisfy the exclusion criterion. We find strong gender- and education-related differences in the distribution of financial literacy and confidence that moderate their influence on financial wealth: Women's wealth increases particularly strongly in their financial literacy. Higher formal education strengthens this effect, but reduces it for men. Men's wealth rises strongly in (excess) confidence, regardless of their education, while women show a much weaker confidence effect. For highly-educated women, this even turns into a negative impact in case of overconfidence. Programs intended for improving financial literacy will hence be particularly helpful to raise women's wealth levels. Surprisingly, closer alignment between perceived and actual financial sophistication appears less relevant