Is Ignorance Bliss?
Here's an interesting study I came across that examines how our attitudes can affect our finances. Published in the Journal of Consumer Affairs this summer, the study suggests that many of us tend to overestimate our creditworthiness and that when we do, we take less care of our finances.
Author Vanessa Gail Perry, assistant professor at the George Washington University School of Business, examined the Freddie Mac Consumer Credit Survey of about 23,000 people. She found that 32 percent of respondents overestimated their credit ratings, or credit scores, which lenders use to determine how risky a consumer is. Only 4 percent underestimated their credit ratings.
Those who overestimated their credit ratings were less knowledgeable about their finances and were more likely to have had difficult experiences in the past. They were less likely to budget, save, or invest regularly. And they tended to have lower incomes, less formal education and didn't own their homes.
Perry also pointed out that they were more likely to be African American or Hispanic and female, possibly because minorities have less experience in financial markets, she said.
Why is this so important?
"This tendency toward overestimation may lead consumers to be less cautious in their financial decision making," Perry said.
Furthermore, she said "this overestimation bias is more likely to affect groups of particular concern to policy makers, including less financially sophisticated, lower-income, African American, and Hispanic consumers."
She concludes that policy makers and consumer advocates should encourage people to take advantage of the Fair and Accurate Credit Transactions act requirements by obtaining a copy of their credit reports and keeping track of changes in their credit scores.
This comes at a time when lawmakers and consumer advocates are talking more about the need for improved financial literacy, thanks to the subprime mortgage meltdown. Perhaps overconfidence played a role in consumers taking out mortgages they really could not afford?
In any case, one thing seems clear, and that is this: Ignorance is not bliss when it comes to your finances.
By Nancy Trejos |
June 5, 2008; 7:08 AM ET
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