A Decomposition Analysis of Racial/Ethnic Differences in Financial Knowledge and Overconfidence

Financial knowledge is often referred to as the key to improving one’s financial decisions. Because of the evident racial/ethnic disparities in wealth, income, and financial wellbeing, it is important to understand the differences in the level of financial knowledge as well. This study examined whether there is a racial/ethnic gap and to understand what might account for potential differences with OLS regression and Blinder-Oaxaca decomposition analyses. The results from the 2018 National Financial Capability Study, with the analytic sample of 21,038 observations showed significant racial/ethnic gaps in objective and subjective financial knowledge, as well as overconfidence in financial knowledge. The level of overconfidence was greatest among Black respondents, followed by Hispanic, White, and Asian/Other. According to the decomposition analyses’ results, individual characteristics explained the majority of the gap in Hispanic-White and Asian/Other-White overconfidence. Other key factors that helped explain the disparities in financial knowledge measures included sociodemographic variables, such as age, marital status, education, and occupation, and financial variables, such as income, homeownership, and financial hardship. With a deeper understanding of the factors related to racial/ethnic differences, policymakers and educators could improve their strategies to enhance financial knowledge and narrow the knowledge and wealth gap among racial/ethnic groups.