The association between objective and subjective financial literacy: Failure to observe the Dunning-Kruger effect

Abstract

Positive correlations have been reported between objective (tests) and subjective (self-report) financial literacy, however, the precise nature of the association has not been examined yet. In particular, it remains a possibility that subjective financial literacy is impacted by the Dunning-Kruger effect: the observation of greater overestimation of ability at the lower-end of objective ability than at the higher-end of objective ability. On the basis of the two US samples (N = 5901 and N = 26,349), the correlation between objective and subjective financial literacy was estimated at 0.273 and 0.266, respectively. Furthermore, the association was found to be essentially linear across the whole spectrum of objective ability, suggesting a failure to observe the Dunning-Kruger effect. The results were interpreted to suggest that people, on average, have some insight into their financial literacy and the degree of insight is approximately equal across the spectrum of objective financial literacy ability. It is concluded that there is increasing evidence to suggest that individual differences research ostensibly supportive of the Dunning-Kruger effect may be based on a statistical artefact.