Re-examining the Dunning-Kruger Effect: Objective vs. Subjective Financial Literacy in the Young and Overconfident

21 Pages Posted: 27 Nov 2023 Last revised: 30 Nov 2023

See all articles by Ekaterina Ipatova

Ekaterina Ipatova

Roehampton University

Khaled Merheb

University of Roehampton - Business School

Date Written: July 28, 2023

Abstract

Our research paper presents a unique and hand-collected dataset comprising 169 student responses to examine the prevalence of overconfidence among undergraduate students. Overconfidence can lead to misguided financial choices not only for individuals but also for their clients, resulting in significant consequences such as a preference for high-risk investments, inadequate risk management, under-diversification, insufficient financial and retirement planning, and excessive borrowing. To study overconfidence we employ the Dunning-Kruger effect as it implies overconfidence on the lower end of financial proficiency.

Our study makes several valuable contributions to the existing literature. Firstly, we analyze the evolution of the Dunning-Kruger effect across different age groups, enabling us to detect the impact of maturity and education on financial overconfidence. Our findings reveal that students aged under 21, who often benefit from a strong family support system and live at home, tend to self-rate their financial abilities higher than their objective knowledge.

Secondly, as we observe groups of more mature students and students progressing through their education journey, we find that their self-belief about finances and their objective financial knowledge tend to gradually align, especially for the over 28 years old group. Our research highlights the potential of a simple 5-minute, 4-question test that can be administered during the final year to reveal overconfidence. This test could be an effective tool for Business Schools to address and rectify overconfidence among their students.

Keywords: financial literacy, education, financial proficiency, Dunning-Kruger effect

JEL Classification: G53, I22

Suggested Citation

Ipatova, Ekaterina and Merheb, Khaled, Re-examining the Dunning-Kruger Effect: Objective vs. Subjective Financial Literacy in the Young and Overconfident (July 28, 2023). Available at SSRN: https://ssrn.com/abstract=4645450

Ekaterina Ipatova (Contact Author)

Roehampton University ( email )

Erasmus House, Roehampton Ln
London, SW15 5PU
United Kingdom

Khaled Merheb

University of Roehampton - Business School ( email )

Roehampton Lane
London, SW15 5SL
United Kingdom
+447375233346 (Phone)

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