Income inequality and financial overconfidence

Abstract

AbstractIn this paper, we examine the relationship between income inequality and overconfidence. Using data from the FINRA Foundation's National Financial Capability Study, we measure respondents' self‐perceived and actual investment knowledge and thus identify overconfident individuals. We also identify for each respondent their U.S. state of residence and the corresponding state‐level income inequality. We then examine the relationship between state‐level income inequality and overconfidence of the survey participants. Using a number of controls, several overconfidence measures, and two different datasets we find a positive and significant relationship between income inequality and overconfidence. We also find evidence that income inequality is positively related to financial satisfaction and financial risk taking. Indeed, we find that as inequality increases, poorer individuals increase their risk willingness.