What you think you know can hurt you: under/over confidence in financial knowledge and preparedness for retirement

Abstract

AbstractWe study whether retirement preparedness of overconfident individuals – those with high self-rated but low objective financial knowledge – and underconfident individuals – those with low self-rated but high objective financial knowledge – differs from that of individuals for whom self-assessed and actual knowledge align. We find that overconfident individuals fare no different than others with similarly low levels of objective financial knowledge in terms of retirement preparedness, while they are less interested in improving their knowledge. Underconfident individuals exhibit worse economic outcomes than others with similarly high financial knowledge but show interest in learning more about retirement. Our results suggest that accompanying financial literacy campaigns with initiatives that increase awareness of one's actual knowledge may be an effective lever to encourage the overconfident to increase their financial competence and to prove to the underconfident that they have sufficient skills to start planning their financial future.