The forms of financial literacy overconfidence and their role in financial well-being

Abstract

Overconfidence in financial literacy (FL) is defined and assessed in various ways, and results regarding the effects of FL overconfidence on financial well-being are inconsistent. Therefore, this study aims to develop our understanding of the processes by which overconfidence in FL influences the financial well-being of consumers; that is to separately examine the effects of the different forms of FL overconfidence on financial well-being. In order to map the associations between FL, the forms of FL overconfidence, and financial well-being, the data of 506 randomly selected Hungarian test-takers were collected by a self-report questionnaire. According to the results, FL and its overestimation (OE) are positively linked to households' financial outcomes. Hence, perceived FL is a better predictor of financial well-being than actual FL skills. Moreover, the results add to the existing body of literature by showing that the effects of the different forms of overconfidence are divergent: overprecision and OE may be damaging. Thus, the paper provides evidence that FL overconfidence is a multifaceted construct, and its different forms affect financial well-being differently.