The significance of financial self-efficacy in explaining women’s personal finance behaviour

TLDR

Policy efforts have focused on financial knowledge, yet effective personal finance management also requires self‑efficacy, a psychological construct of confidence in one’s financial abilities. This study investigates how financial self‑efficacy predicts women’s personal finance behavior using a psychometric measure. The authors analyzed a 2013 Australian survey of women, applying a psychometric instrument to assess self‑efficacy and its relation to financial product holdings. Results show that higher financial self‑efficacy strongly predicts holding investment and savings products and avoiding debt, and remains a significant predictor even after controlling for education, risk preferences, age, income, and financial literacy.

Abstract

Much policy attention has been placed on enhancing individuals’ financial knowledge and literacy, chiefly through financial education programs. However, managing one’s personal finances takes more than financial knowledge and literacy: an individual also needs a sense of self-assuredness, or ‘self-belief’, in their own capabilities. This personal attribute is known within the psychology literature as ‘self-efficacy’. This paper examines the significance of an individual’s financial self-efficacy in explaining their personal finance behaviour, through the application of a psychometric instrument. Using a 2013 survey of Australian women, financial self-efficacy emerges as one of the strongest predictors of the type and number of financial products that a woman holds. Specifically, our analysis reveals that women with higher financial self-efficacy – that is, with greater self-assuredness in their financial management capacities – are more likely to hold investment and savings products, and less likely to hold debt-related products. Even alongside other important factors – such as education, financial risk preferences, age and household income – the explanatory power of financial self-efficacy is found to be significant at the 1% critical level. Moreover, the significance of financial self-efficacy is independently identified from that of financial literacy factors, which bears important implications for the development of policies aiming to improve financial outcomes.