Financial overconfidence: Investing is easy, right?

FSC research highlights the increasing gap between perceived financial confidence (82%) and financial literacy (47%).

Can Kiwis feel their financial confidence growing against decreasing financial literacy? The FSC undertook research in 2023 to understand this paradox and to ask specific questions about investing. 

The questions were designed to test actual knowledge through what we termed ‘financial trivia’ rather than self-perception, and the results were interesting.

The first financial trivia investment question asked:

‘Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would you be able to buy more than today, exactly the same as today, or less than today with the money in this account?’.

While 58% got the answer (buy less than today) correct, it left 42% thinking that they would be able to buy the same or more, demonstrating a lack of understanding of how interest and inflation work. 

The second question asked:

‘Do you think that the following statement is true or false? Buying shares in a single company usually provides a safer return than buying shares in a number of different companies.’

The question was designed to test understanding of the importance of diversification in an investment portfolio, and here, respondents fared better, with 73% correctly identifying that this statement was false. 

Next we asked:

‘Do you think that the following statement is true or false? An investment with a high return is likely to be high risk.'

Most respondents, 90%, correctly identified that this statement was true and demonstrated an understanding of risk versus return.

Finally we tested:

‘If you switched from a balanced KiwiSaver fund to a growth KiwiSaver fund, would you be investing in more or less risky assets?’

Designed to test the knowledge of different portfolios available in KiwiSaver investments, this question proved trickier, with just over half, 57%, identifying it would be riskier in a growth fund.

Overall, the results supported that a perception gap does exist.

Perception of financial confidence is higher than the reality of financial literacy, with 82% on average responding as financially confident, and just 62% on average having a good understanding of the four financial concepts investigated.

 
Figure 1: The Perception Gap, FSC research report 2023.
*Very to Reasonably Confident respondents
**Partially/Not Confident respondents

The research supported previous research in New Zealand that overall financial literacy improves with age and women outperform men.

Less than half (48%) of 29 year olds got 3 or 4 questions correct, compared to 86% of 60+ year olds. The number of women who got 3 or 4 questions correct was 66% compared to 57% of their male counterparts.

The results of these questions demonstrate a disconnect between financial confidence and financial literacy and further show that better financial literacy does not necessarily lead to more financial confidence.

This article is based on FSC's research Money & You – The Perception Gap, which is available here.