The Effects of Financial Literacy Overconfidence on the Mortgage Delinquency of US Households

Abstract

This study investigated the effect of objective and subjective financial literacy on mortgage payment delinquency using the 2015 National Financial Capability Study dataset. A hierarchical model showed a substantial negative effect of objective literacy on delinquency, but subjective literacy did not have a significant effect. The predicted likelihood of delinquency at the 10th percentile of objective literacy was over three times as high as the likelihood at the 90th percentile. In a model with combinations of high or low objective and subjective financial literacy, those who were overconfident had a delinquency likelihood three times as high as those who had high objective and subjective literacy. Subjective literacy had substantial effects on delinquency both for high‐ and low‐objective literacy levels. In financial education, attention should be focused not only on objective learning but also making sure consumers are aware of the limitations of their understanding.

Debt and Overindebtedness: Psychological Evidence and its Policy Implications

“…While one might hope it occurs because the financially literature have less need of advice, it might also be due to overconfidence, a trait that has been shown to lead to unwillingness to take financial advice (A. Anderson et al., 2017). Overconfidence has been shown to be hazardous in several kinds of financial decisions, including decisions relating to debt such as making mortgage payments late (Kim et al., 2020) and taking on unwise amounts of debt (Cwynar et al., 2020). Mimicking the financially literate might not, therefore, always be sound strategy.…”

Propensity to Plan, Financial Knowledge, Overconfidence, and Credit Card Management Behaviors of Millennials

“…Further, we constructed three additional measures of overconfidence to check robustness. Those measures are as follows: (i) the numerical difference between standardized subjective knowledge and standardized objective knowledge, (ii) a residual from a least squares regression of objective on subjective knowledge, and (iii) a binary measure of overconfidence defined as having lower than median objective and higher than median subjective knowledge following the procedure from previous studies (Kim, Lee, et al, 2019; Porto & Xiao, 2016; Robb et al, 2015; Xia, Wang, & Li, 2014).…”

“…Financial knowledge has gained increased attention as the key to improve individuals’ financial behaviors, and a high level of financial knowledge has been related to positive financial behaviors (Allgood & Walstad, 2013; Friedline & West, 2016; Henager & Cude, 2016; Henager & Mauldin, 2015; Robb & Woodyard, 2011). In several studies related to financial knowledge, concerns about the inconsistency between objective and subjective financial knowledge has gained attention (Kim, Lee, & Hanna, 2019; Porto & Xiao, 2016; Robb, Babiarz, Woodyard, & Seay, 2015). Objective financial knowledge refers to one’s actual knowledge, whereas subjective knowledge refers to the perception of one’s knowledge (Asaad, 2015; Robb et al, 2015; Woodyard, Robb, Babiarz, & Jung, 2017).…”

From wheel of fortune to wheel of misfortune: Financial crises, cycles, and consumer predation

“…For example, Kim et al . (2020) point to low‐income homeowners who ended up struggling to make ends meet after buying houses they could not afford due to such unexpected charges as repairs. In their view, consumers are often overconfident and neglect to seek proper advice vi .…”