Invest in Financial Literacy Overconfidence

Consumer overconfidence often leads to poor consumer decisions. For instance, golfers fooled by experimenters into thinking they were more skilled than objectively true showed greater interest in unnecessarily sophisticated golf balls. However, researchers at University of Pecs in Hungary find an exception: Subjective overestimation of financial literacy can have beneficial effects for consumers. Given the proper support, those self-confident consumers are more likely to plan well for retirement than are those who accurately assess their financial literacy. The degree of self-perceived financial ability was a better predictor of financial wellbeing than was actual financial skills.
     The proper support here includes access to accurate information and to role models of skilled financial decision makers. The overestimation of financial literacy boosts people’s motivation to make full use of those resources. The exceptions to the exception—when overconfidence endangers financial stability—occur when actual financial skills are quite low.
     The combination of low skills and high confidence is more likely in younger consumers because of their inexperience. This argues for parents teaching financial literacy to their children. Based on their study results, researchers at Iowa State University, Ohio State University, and University Putra Malaysia recommend that retailers of financial services encourage parents to include offspring during presentations to clients and prospective clients. The researchers also urge parental support for children starting to invest at an early age and making investing a habit.
     With attention to the other end of lifespan, foster both financial skills and money management confidence in older adults. After all, American adults ages 65 and beyond hold about 35% of the nation’s wealth. I’d expect a similar percentage in other nations.
     An explanation for the helpful function of financial literacy overestimation is in comfort with the complexities of investing money. Researchers at UCLA found that interest in enrolling in a retirement savings program involving some risk was increased by asking the consumer an easy instead of a difficult question about finance. Further, when people were given an abundance of technical information about a particular mutual fund, the people reported a drop—not a climb—in their subjective knowledge, and thereby became less willing to invest in that fund.
     Being flooded with information made people less confident and more wary. Caution was also stimulated, in another of the UCLA studies, when investment prospects were reminded what they did not know about the mutual fund, again decreasing the self-reported subjective knowledge.

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