The Smart Money: She Saves, He Spends

by Ronald T. Wilcox

Marriage in America has taken more than its share of hits over the last four decades.

Ronald T. Wilcox is a faculty fellow at the National Marriage Project and professor of business administration at the Darden School of Business at the University of Virginia. He is the author of Whatever Happened to Thrift.

Managing a household requires a great deal of work. Somebody has to earn money, tend to the children, fix the leaking pipe, call the cable company, do the laundry, pay the bills, and perform the countless other day-to-day tasks that modern life requires.

Married couples go about accomplishing these tasks in many different ways, but a common theme that is true for almost all couples is that there exists some division of labor, some notion that the husband or wife “owns” specific tasks and that it is primarily one spouse’s responsibility to make certain things get done.

This division of labor also applies to the tasks associated with the financial management of the family. Women may make more of the day-to-day spending decisions associated with activities such as shopping and bill-paying, but men generally take the lead in longer-term investment activity.[1] But recent research in evolutionary psychology, sociology, and finance suggests that many families may be organizing their financial management in a way that does not maximize their economic well-being.

Women and men bring different emotional and psychological toolkits to bear on the difficult decisions they face. And protecting the long-term economic well-being of the family through prudent and effective investment activity is one of the difficult yet important problems of modern life.

Unwisely Divided Labor

Even though men typically take the lead when it comes to managing the family investments, they have two psychological characteristics that play havoc with their ability to invest money.

First, while all human beings tend to be overconfident in their own ability, this cognitive bias is particularly strong in men.[2] Evolutionary psychologists have speculated that this tendency towards overconfidence arose because of the tasks men performed in early human societies. Men hunted, and when hunting it improves your survival chances if you are very confident when face-to-face with a wild animal.

Today, many family men face the market rather than wild animals. But, unlike the hunt, men’s overconfidence often dooms them in this situation. They tend to trade stocks and bonds more actively because they are convinced they know what the next market movement will be, what is likely to go up, and what is likely to go down. In so doing, they incur a host of transaction costs associated with trading—from commissions, taxes, to bid-ask spreads—but do not pick assets any better than women.[3]

By contrast, the average woman, less confident in her own abilities, will switch investments less often and in so doing generate risk-adjusted returns (i.e., returns that correct for the amount of risk that is inherent in an asset) that are superior to her male counterpart’s. For most households, a more passive approach to investing where the investor does not frequently change investments yields superior long-run returns. Even in the more sedate world of mutual fund investing, women seem to have a better ability to pick good funds because they concentrate on the fees a fund charges rather than what fund happens to be hot at any given moment.[4] This is particularly important given the prominence of mutual funds in household retirement portfolios.

Second, men are also less likely to listen to advice, including financial advice.[5] If a company has a retirement planning seminar for their employees we can be quite confident of two things. Women more than men will think they need the seminar and women will be more likely than men to use the information obtained in the seminar to make better financial decisions. And in a world of modern financial markets, exceedingly complicated investment alternatives, and aggressively marketed financial products, it is the rare individual who could not benefit from some advice, particularly for long-term financial planning.

And so we have what amounts to a stark paradox in investing: Men think they know what they are doing but often do not and women think they do not know what they are doing but often do, or at least know enough to turn to a professional.

But the table gets turned when we look at another important element of household financial behavior: handling day-to-day shopping and financial transactions. Women were the gatherers in early human societies. Gathering requires a different set of cognitive skills than hunting. Important among these skills is the ability to remember the location of things (berries, for most of human history). Women are simply more adept at this than men, finding things and remembering how to return to find them again.[6]

But just as men’s hunting instincts help make them inferior investors relative to women, women’s gathering instincts can wreck household finances as well. In the context of modern markets, women are aggressive shoppers. They enjoy shopping, spending money, and, unfortunately, do it to excess more often than men do.[7] Men lose money at the stockbroker’s office; women lose it at the shopping mall.

Practical Advice

This research suggests some very practical advice for married couples, advice which is often at odds with the traditional division of financial labor now found in most homes.

For many married couples, husbands should take a more active role in setting weekly or monthly spending budgets and in actually performing the necessary shopping. Even if they don’t enjoy doing it, it is that natural aversion to the activity that is likely to lead to stronger household balance sheets.

Wives should take the lead when it comes to long-term financial planning. They should seek professional advice, when such advice is available, and act on that advice. They should take a passive approach to investing, setting up the investments and changing them infrequently, an approach their husbands would be less likely to employ. And although many women will not look forward to this particular task, just as their husbands will not look forward to shopping, it is that natural aversion that will pay long-term dividends for the family.

  1. Melvin Prince, “Women, Men, and Money Styles,” Journal of Economic Psychology XIV (1993), 175–182.
  2. Mary A. Lundeberg, Paul W. Fox and Judith Punccohar, “Highly Confident but Wrong: Gender Differences and Similarities in Confidence Judgments,” Journal of Educational Psychology LXXXVI (1994), 114–121.
  3. Brad M. Barber and Terrance Odean, “Boys will be Boys: Gender, Overconfidence and Common Stock Investing,” The Quarterly Journal of Economics (February 2001), 261-292.
  4. Ronald T. Wilcox, “Bargain Hunting or Star Gazing: Investors Preferences for Stock Mutual Funds,” Journal of Business (October 2003), 645-663.
  5. Robert Clark, Madeleine D’Ambrosio, Ann McDermed, and Kshama Sawant, “Sex Differences , Financial Education and Retirement Goals,” in Olivia Mitchell and Stephen Utkus (eds.), Pension Design and Structure: New Lessons from Behavioral Economics (Oxford: Oxford University Press, 2004).
  6. Joshua New, Max M. Krasnow, Danielle Truxaw and Steven J.C. Gaulin, “Spatial Adaptations for Plant Foraging: Women Excel and Calories Count,” Proceedings of the Royal Society (B) 274 (2007), 2679-2684.
  7. Scott I. Rick, Cynthia E. Cryder, and George Loewenstein. “Tightwads and Spendthrifts,” Journal of Consumer Research (April, 2008), 767-782.