The Ontario Securities Commission (OSC) found the average investor answered only 53% of financial questions correctly, so why are we so confident in ourselves?
Humans have a cognitive bias when we process new information:
According to Simply Psychology, cognitive biases are unconscious errors in judgment that arise from problems related to memory, attention, and other mental mistakes. We live in an increasingly complex world and to survive, our brain is wired to make quick assessments and decisions and keep us safe. We will unfairly support or critique someone or something that supports our current beliefs because it's easier for our brains to make sense of the information.
According to the OSC, about 30% of Canadian investors were overconfident in their own financial knowledge. Investors were the least knowledgeable regarding their investment costs and investor protections, with only 36% and 44% correctly answering questions on the respective subjects. The study found that self-directed investors were the most financially literate, and the average self-directed investor answered 59% of the questions correctly. In contrast, 52% of investors with advisors and 49% working with a robo-advisor answered the questions correctly. While its promising self-directed investors performed best as they manage their accounts, it's surprising they did not do much better than other investor groups. When comparing genders, women were slightly less financially literate than men, at respectively 50% to 56% correct answers.
We know our emotional reactions are important to manage when it comes to investments. Making quick decisions based on our temporary emotions rather than following a financial plan can lead investors astray. However, understanding how our brain processes information is key. Once we recognize our cognitive bias, we can make decisions using all available information rather than information consistent with our emotional desires and supportive of our current beliefs.
It's important to assess if we really understand our finances as well as we think we do. Take advantage of professional advice that considers where you stand and your personal goals.
Read the full Investor Knowledge Study published by the Ontario Securities Commission in September of 2022 here or copy and paste the link below into your browser:
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