There are differing opinions about whether overconfidence is good for humanity. Some say that believing that you’re better than you really are is a self-fulfilling prophecy that’s good for ambition and swift decision making. Overconfidence can lead to boosts in social status, and overconfident populations have been shown to be more evolutionarily stable. Others argue that overconfidence leads to hubris, self-deception, and blind spots in decision making.
In behavioral finance, overconfidence for traders can lead to risky stock picks and overtrading. (Malcolm Gladwell wrote about overconfidence as one of the psychological flaws of Wall Street leading to the crash.) But what about personal finance? Do individuals take on the same attitudes as stock traders when dealing with their own money, where losses can hurt their own bank accounts?
The online startup LearnVest, which aims to bring financial planning to the masses, looked into this question of how confidence affects financial behavior. It’s been documented in the past that overconfidence can hurt retirement savings, but LearnVest took a more detailed look drawing on survey responses from their dataset of over 100,000 users.
“What we saw in our data is that people in their twenties feel like they have a better grasp on their finances than they do and it’s because of an enormous financial literacy problem,” said Alexa von Tobel, founder and CEO of LearnVest. “They enter their 20s thinking juggling a daily budget is what financial planning is about. In their instincts, they feel that the way to solve financial problems is to earn more.”
Read the rest at TheAtlantic.com