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Both objective and subjective financial knowledge can predict healthy financial behaviors (Allgood & Walstad, 2016; Andreou & Philip, 2018; Henager & Cude, 2016; Herawati et al., 2018; Kim & Yuh, 2018; Tang & Baker, 2016; Yao & Meng, 2018; Zhu & Chou, 2018b). Due to surprisingly mixed findings, the joint role of objective and subjective financial knowledge in shaping financial habits has become a focus of attention in recent studies. Four combinations of objective and subjective financial knowledge are recognized, and on this basis, individuals can be categorized as overconfident, underconfident, competitive, or naïve regarding financial literacy (Porto & Xiao, 2016; Xia et al., 2014).
Overconfidence in financial literacy indicates an evaluation of personal subjective financial knowledge as being higher than average, while actual objective financial knowledge is lower than the average; financial literacy underconfidence is defined as the opposite. Those whose objective and subjective financial knowledge are both above average are identified as having financial literacy competence; while those for whom both evaluation outcomes are lower than average are considered to be naïve regarding financial literacy (Porto & Xiao, 2016; Xia et al., 2014).
The 2012 National Financial Capability Study performed by the Financial Industry Regulatory Authority (FINRA) revealed that, among U.S. respondents, the percentages of financial literacy overconfidence, underconfidence, competence, and naïvete were 11.6%, 33.8%, 28.1%, and 26.5%, respectively (Porto & Xiao, 2016). Based on a nationwide online household consumption and finance survey in China, Xia et al. (2014), reported that 23.9% and 19% of respondents were financial literacy overconfident and underconfident, respectively. Using the data from a representative sample of Dutch families that included 1,276 households, Kramer (2014) reported that the percentage of households categorized as financial literacy overconfident or underconfident were both 29.5%.
Previous research has shown greater interest in assessing the effect of financial literacy overconfidence on subsequent financial behaviors rather than on the outcomes of the other three combinations. When individuals express overconfidence about having their financial issues under control, they are likely to continue their current behavior without further analysis of technical details and potential challenges; these individuals believe that their financial behaviors will necessarily lead to positive outcomes (Bandura, 2018). Therefore, people with financial literacy overconfidence are less likely to engage in protective financial behaviors and are...