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The Effects of Financial Literacy Overconfidence on the Mortgage Delinquency of US Households

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  • Kyoung Tae Kim
  • Jonghee Lee
  • Sherman D. Hanna

Abstract

This study investigated the effect of objective and subjective financial literacy on mortgage payment delinquency using the 2015 National Financial Capability Study dataset. A hierarchical model showed a substantial negative effect of objective literacy on delinquency, but subjective literacy did not have a significant effect. The predicted likelihood of delinquency at the 10th percentile of objective literacy was over three times as high as the likelihood at the 90th percentile. In a model with combinations of high or low objective and subjective financial literacy, those who were overconfident had a delinquency likelihood three times as high as those who had high objective and subjective literacy. Subjective literacy had substantial effects on delinquency both for high‐ and low‐objective literacy levels. In financial education, attention should be focused not only on objective learning but also making sure consumers are aware of the limitations of their understanding.

Suggested Citation

  • Kyoung Tae Kim & Jonghee Lee & Sherman D. Hanna, 2020. "The Effects of Financial Literacy Overconfidence on the Mortgage Delinquency of US Households," Journal of Consumer Affairs, Wiley Blackwell, vol. 54(2), pages 517-540, June.
    • Handle: RePEc:bla:jconsa:v:54:y:2020:i:2:p:517-540
    DOI: 10.1111/joca.12287
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    References listed on IDEAS

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    Cited by:

    1. Christi R. Wann & Lisa A. Burke-Smalley, 2023. "Attributes of Households that Engage in Higher Levels of Family Financial Planning," Journal of Family and Economic Issues, Springer, vol. 44(1), pages 98-113, March.
    2. Gerrans, Paul, 2021. "Undergraduate student financial education interventions: Medium term evidence of retention, decay, and confidence in financial literacy," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    3. Olivier Mesly & David W. Shanafelt & Nicolas Huck & François‐Éric Racicot, 2020. "From wheel of fortune to wheel of misfortune: Financial crises, cycles, and consumer predation," Journal of Consumer Affairs, Wiley Blackwell, vol. 54(4), pages 1195-1212, December.
    4. Kyoung Tae Kim & Soo Hyun Cho & Jing Jian Xiao, 2023. "Is Ignorance Bliss? Use of Alternative Financial Services, Financial Knowledge, and Financial Anxiety," Journal of Family and Economic Issues, Springer, vol. 44(4), pages 956-967, December.
    5. Arvid O. I. Hoffmann & Daria Plotkina, 2021. "Let your past define your future? How recalling successful financial experiences can increase beliefs of self‐efficacy in financial planning," Journal of Consumer Affairs, Wiley Blackwell, vol. 55(3), pages 847-871, September.
    6. Wookjae Heo & Abed G. Rabbani & Jae Min Lee, 2021. "Mediation between financial risk tolerance and equity ownership: assessing the role of financial knowledge underconfidence," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 26(3), pages 169-180, September.
    7. Cupák, Andrej & Fessler, Pirmin & Hsu, Joanne W. & Paradowski, Piotr R., 2022. "Investor confidence and high financial literacy jointly shape investments in risky assets," Economic Modelling, Elsevier, vol. 116(C).
    8. Tran Huynh, 2023. "Financial Literacy and Mortgage Payment Delinquency?," Jena Economics Research Papers 2023-007, Friedrich-Schiller-University Jena.
    9. Sunwoo T. Lee & Kyoung Tae Kim, 2022. "A Decomposition Analysis of Racial/Ethnic Differences in Financial Knowledge and Overconfidence," Journal of Family and Economic Issues, Springer, vol. 43(4), pages 815-831, December.

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