Individuals' differences in self-assessment: The relationship between subjective and objective financial literacy

Financial literacy refers to the knowledge required for individuals to make financial decisions. When individuals' subjective assessment of their financial literacy does not align with their actual level of financial knowledge (i.e., the discrepancy between subjective and objective financial literacy), it can result in a range of adverse decision-making outcomes. Therefore, it is crucial to investigate the relationship between subjective and objective financial literacy. Drawing on the Dunning-Kruger effect, there may exist a systematic bias between these two measures. To elaborate further, individuals with lower levels of objective financial literacy tend to assess themselves less accurately and are more likely to overestimate their financial literacy. While one study previously declaimed a failure to discover the Dunning-Kruger effect on financial literacy, we argue the importance of reevaluating this phenomenon by clarifying its definition and adopting an updated statistical approach. In our study, which leveraged a nationally representative sample of 10,058 Chinese individuals, we utilized the absolute difference between objective and subjective financial literacy as a measure of assessment accuracy. Our findings support the existence of the Dunning-Kruger effect in the realm of financial literacy. To be more specific, as individuals' objective financial literacy improved, so did their assessment accuracy. This research not only elucidates the factors contributing to the inconsistent results regarding the Dunning-Kruger effect but also employs an innovative approach to unveil the phenomenon, thus expanding its relevance and applicability.