Confidence and Competence in Investor Cognition: An Exploratory Analysis of the Calibration Gap and Decision Biases

Abstract

This article explores how subjective confidence and objective knowledge relate to investment decision behavior. The data are the investor sub-sample of the 2024 U.S. National Financial Capability Study (N=2861). Subjective knowledge uses a seven-point self-assessment, objective knowledge a twelve-item test; they correlate at only 0.376, and 29.4% of investors are in a high-self-assessment, low-ability state. Controlling objective knowledge, each standard deviation of self-assessment is associated with high-frequency trading 7.87 percentage points higher, complex product holding 11.04 higher and social-media-driven decisions 9.96 higher. Objective knowledge varies by outcome: positive for high-frequency trading (5.84 points), not significant for complex products, negative for social-media-driven decisions and fraud susceptibility. Those who participated in financial education score 0.320 standard deviations higher on self-assessment but only 0.116 higher on objective knowledge, so their calibration gap is larger. The data are cross-sectional; conclusions are conditional correlations, not causal effects.