Financial literacy and decision-making: The impact of knowledge gaps on financial outcomes

Abstract

This study addresses a critical gap in understanding why financial literacy interventions often prove ineffective by examining the role of metacognitive miscalibration in financial decision-making. We investigate how individuals who systematically overestimate their financial knowledge exhibit distinct behavioral patterns that undermine financial outcomes across multiple domains. Drawing on nationally representative data from the 2021 U.S. National Financial Capability Study, we analyzed decision-making patterns among individuals exhibiting financial overconfidence compared to equally knowledgeable peers without such overconfidence. Results demonstrated that overconfident individuals significantly reduce their investment participation, retirement planning, and emergency savings behaviors. Paradoxically, these individuals reported higher financial satisfaction despite objectively poorer outcomes, creating a feedback loop that prevents corrective learning. These findings showed that misjudging one's own financial knowledge was a consistent obstacle to being financially healthy, as it leads to reduces help-seeking behavior and poor risk evaluation, clarifying why regular financial education programs often don't work well. © 2025 Elsevier B.V., All rights reserved.