Perception Bias in the Financial Knowledge of American Adults

Abstract

Perception biases—individuals’ tendency to either overestimate or underestimate their abilities—exist in the domain of financial knowledge. This study utilizes data from a nationally representative sample of 26,218 American adults provided by the 2018 National Financial Capability Study. A two-step procedure is used to analyze the data. In the first step, ordered-probit regression models are used to estimate subjective financial knowledge as a function of objective financial knowledge. The surrogate residuals from these models represent the degree to which subjective knowledge deviates from objective knowledge and are interpreted as measures of perception bias. In the second step, variable-intercept mixed-effects models are estimated to identify the predictors of perception bias in financial knowledge. The results show that individuals with higher perceived math ability and higher risk-taking attitudes are more likely to overestimate their financial knowledge. Surprisingly, individuals who participated in financial education programs or lived in states requiring financial education were also more likely to overestimate their knowledge. These findings have important implications for financial educators, advisors, and policymakers.