Int. J. Business Performance Management, Vol. 21, Nos.

1/2, 2020 95

Young adults’ financial literacy and overconfidence

bias in debt markets

Andrzej Cwynar* and Wiktor Cwynar

University of Economics and Innovation,
Projektowa 4, 20-209 Lublin, Poland
Email: andrzej.cwynar@wsei.lublin.pl
Email: wiktor.cwynar@wsei.lublin.pl
*Corresponding author

Wiktor Patena and Welcome Sibanda

Higher Colleges of Technology, DMC,
City Walk, Building 13A/102,
Dubai, UAE
Email: wpatena@hct.ac.ae
Email: wsibanda@hct.ac.ae

Abstract: It is documented that overconfidence has negative influence on

numerous financial behaviours. Little is known, however, about the link
between overconfidence and behaviour of consumers in debt markets. This
article investigates the link between overconfidence in debt literacy and debt
behaviour. To do that, we applied logit and linear regression models using data
from a sample of 600 adult Poles aged between 18 and 35. The results indicate
that the overconfident respondents were more likely to borrow. We obtained
mixed results regarding the link between overconfidence and debt behaviour.
Simple binary measure of overconfidence turned out insignificant in predicting
the behaviour, however the quantitative measures of overconfidence were
found significantly and positively related to unhealthy debt behaviour. Policy
makers may need to run educational programmes that address the behavioural
aspects of overconfidence, in order to empower society and improve debt
behaviour and overall economic performance.

Keywords: financial literacy; debt literacy; overconfidence; debt behaviour;

debt markets; young adults.

Reference to this paper should be made as follows: Cwynar, A., Cwynar, W.,
Patena, W. and Sibanda, W. (2020) ‘Young adults’ financial literacy and
overconfidence bias in debt markets’, Int. J. Business Performance
Management, Vol. 21, Nos. 1/2, pp.95-113.

Biographical notes: Andrzej Cwynar is an Associate Professor at the

University of Economics and Innovation (UEI) in Lublin, Poland. He was a
former Dean of the Department of Economics at the UEI, Founder and Director
of the Institute for Financial Research and Analyses (2010–2013), and
Editor-in-chief of the Scientific Quarterly ‘e-Finanse’ (2004–2013). He is a
business associate of Splentum Ltd. The author and co-author of several books
and over 100 articles devoted mainly to financial issues. His main field of
interest is corporate finance and financial management as well as financial
literacy with special emphasis on debt issues.

Copyright © 2020 Inderscience Enterprises Ltd.

96 A. Cwynar et al.

Wiktor Cwynar is an Assistant Professor at the University of Economics and

Innovation, Poland. CEO of spin-off Splentum Ltd. During his professional
career, among others, he held the following positions: Head of Group
Controlling at Grupa Azoty S.A., one of the biggest companies listed on
Warsaw Stock Exchange, Rector of Wyższa Szkoła Biznesu – National Louis
University in Nowy Sącz, and Partner at Polish Investment Fund. His main
field of scientific interest is financial literacy, debt literacy, financial education
and value based management (VBM). He is the author of many scientific
articles on finance and VBM.

Wiktor Patena is a Jagiellonian University and the University of Hull graduate.

Currently Associate Executive Dean of Business Division at Higher Colleges of
Technology, Dubai, UAE. Previously a Managing Partner at Capinski & Patena
Ekspertyzy Finansowe consulting company, Privatization Advisor to the
Ministry of Treasury (2009–2015), the Vice-Provost (2009–2011) and Provost
of WSB – National Louis University in Nowy Sącz (2012–2014). An author of
the book: In the Quest for a Company’s Value, Kraków, 2011 and co-author of
two other books. He specialises in company valuation and behavioral finance.

Welcome Sibanda holds a PhD in Finance from Cass Business School, UK and
an MBA from Birmingham University Business School, UK. He is an Assistant
Professor of Finance at Dubai Men’s College (HCT, Dubai). He is a member of
the CFA–UK Society, CII, UK and CISI, UK. Prior to joining HCT, he was an
Assistant Professor of Finance at Heriot University, Dubai Campus, where he
served as the Director of Undergraduate Studies. His research interests span
portfolio theory dynamics, fin-tech models and SME dynamics.

1 Introduction

Overconfidence is well-recognised as a psychological bias that may have numerous

adverse consequences, including in the financial domain. Financially overconfident
individuals engage in more risky activities (Camerer and Lovallo 1999; Xia et al., 2014)
and have lower achievement levels (Barber and Odean 2001). Moreover, they are more
likely to refrain from asking for help or seeking advice (see, e.g., Gentile et al., 2016;
McCannon et al., 2016 for a comprehensive overview). As a result, the financial
behaviour of overconfident consumers may be excessively (and unnecessarily) costly –
for them, as well as for society as a whole.
In this article we study the link between overconfidence in debt literacy and debt
behaviour. To this end, we surveyed a sample of young adult Poles (n = 600) and applied
logistic and multiple linear regressions to process their survey reports. Our study focuses
on the debt literacy and borrowing behaviour (rather than the general financial literacy
and behaviour) of young adults (rather than of adults in general), for two reasons.
First, the study investigates the relationship between knowledge about debt and the
choice to incur a given amount of debt. The background to this is that knowledge about
debt markets affects borrowing attitude and behaviour. Further, the 2008 financial crisis
showed that household credit and loans may engender global and long-lasting recession.
Specifically, the crisis showed that deregulation, disruptive technologies and the advent
of complex and risky borrowing products, traded on a self-assessment basis with minimal
 Young adults’ financial literacy and overconfidence bias in debt markets 97

evidential documentation, may lead to macroeconomic tensions and calamitous

consequences.
Second, the life-cycle hypothesis (Ando and Modigliani, 1963; Modigliani and
Brumberg, 1954) indicates that individuals in early adulthood have the most reason for
borrowing, because credit or loans allow them to close the gap between their desired
level of consumption and their current (insufficient) income, while they assume that they
will be able to pay off their debts later in life. Additionally, previous research shows that
young adults are at a significant disadvantage on nearly all measures of financial
competency and behaviour (FINRA, 2013).
A great deal is known about the link between overconfidence and the asset-related
behaviour of individuals. On the other hand, the influence of overconfidence on debt-
related behaviour remains as yet largely unexplored. We contribute to the existing
literature by examining whether participation in the debt market is linked to debt literacy
and overconfidence, and whether overconfidence affects the debt behaviour of those who
borrow. To the best of our knowledge, this is the first study examining such effects. The
originality of our study also stems from the application of original measurement tools: a
debt literacy test and a debt behaviour scale. We believe that this, along with the new
dataset used in the study, sheds additional light on the still little-studied phenomenon of
overconfidence in financial literacy and its effects on household finance.
The paper is structured as follows. Section 2 is the literature review, which lays the
ground for the hypotheses, Section 3 describes the data and methodology, Section 4
presents the results, and Section 5 contains a discussion and our conclusions.

2 Literature review and development of hypotheses

Overconfidence is a well-known psychological bias, deemed ‘the most significant’ by

some influential academics (Kahneman, 2011). In its most general and broad sense,
overconfidence means confidence that is not justified, or – simply put – excessive
confidence. The scientific literature, however, distinguishes several different forms of
overconfidence. This applies particularly in psychology, where miscalibration (or, in
other words, over-precision) – that is, placing confidence intervals around forecasts that
are too narrow (or being unable to form a correct assessment of the number of mistakes
one makes) – is separated from other forms of overconfidence such as the better-than-
average effect, the illusion of control, and unrealistic optimism (Skala, 2008). These other
forms of overconfidence are treated both individually and jointly in the relevant research.
For example, Moore and Healy (2008) use the term ‘overestimation’ to capture the extent
to which individuals overrate their abilities, performance, level of control, or chance of
success, and separate this operationalisation of overconfidence from ‘over-placement’
(i.e., better-than-average effect) and ‘over-precision’ (i.e., miscalibration). This implies
that overestimation in Moore and Healy’s (2008) typology includes not only the illusion
of control, but also unrealistic optimism. On the other hand, Grubb (2015) uses a
broader two-way division of overconfidence into over-precision (miscalibration) and
over-optimism. In Grubb’s division, over-optimism is a combination of Moore and
Healy’s (2008) overestimation and their over-placement, since Grubb (2015, p.9) defines
over-optimistic individuals as those who overestimate ‘their own abilities or prospects,
98 A. Cwynar et al.

either in absolute terms or in comparison to others’. This diversity of the forms and
typologies of overconfidence hampers comparisons of the findings reported by different
researchers. Such comparisons are additionally impeded because of the lack of
homogeneity in the instruments used to measure even the same forms of overconfidence.
In economics and finance – as opposed to psychology – the research is focused on
over-optimism rather than on over-precision (Skala, 2008). Specifically, many
researchers in economics and finance-related domains conceptualise overconfidence as
an overstatement of one’s knowledge. The operationalisations of overconfidence defined
in this way are diverse (see, for instance, Gentile et al. (2016) for an overview and
discussion). Many studies operationalise it simply as the difference between actual
knowledge (measured objectively through a test) and the individual’s self-assessment of
his or her knowledge. However, as Skala (2008, p.34) indicates based on her
comprehensive review of the research in the field of overconfidence, ‘even a general
concept of overconfidence allows to account for many phenomena in finance that the
standard economic theory does not explain’.
The literature in economics and finance concentrates on the effects of overconfidence
on human behaviour in economic contexts. Similarly, the economic and financial
research on overconfidence shows that, as in other domains, it is a widespread
phenomenon. DellaVigna and Malmendier (2006) and Grubb and Osborne (2015) posit
that consumers are customarily biased and are either over-optimistic or over-pessimistic
regarding consumptive quantity or price or a combination of these two dimensions. This
irrationality results in poor choices and severe consequences for consumer welfare,
because of excessive costs or compromised utility, which has massive repercussions for
the market mechanism, allocative mechanism, utility theory and public policy. Barber
and Odean (2001) argue that overconfidence and over-optimism in financial decision-
making are rife, with economic agents who believe that they are highly knowledgeable
and capable of handling their personal finances. Reality indicates that such consumers are
not competent when pressed on objective questions, fail to save adequately for retirement
and are overburdened with loans. They do not save enough because they are overly
optimistic about the future performance of their investments, and they over-borrow
because they are overconfident that they are going to be able to repay their loans on time.
In such a scenario, effective financial literacy must condition and balance the economic
agent’s powers of judgement.
Vast majority of empirical studies in economics and finance which are devoted to
overconfidence concentrate on the asset markets and examine the behaviour of investors
in these markets – in terms of both their participation in the market, and their likelihood
to perform unhealthy investing behaviours once they entered the market. Xia et al. (2014)
evidenced that financial literacy overconfidence is positively related to stock market
participation. Following previous studies showing that the participation – even small –
has a positive effect on consumers’ long-life wealth accumulation (Rooij et al., 2007;
Campbell 2006), Xia et al. (2014) assumed stock market participation as an indicator of
consumer financial well-being. However, they did not scrutinise how the overconfident
individuals participate in the stock market compared to other participants, that is – how
they behave when transacting in the market.
The findings regarding the link between overconfidence and asset market behaviour
are unambiguous and provide clear conclusions. They show that overconfident investors
 Young adults’ financial literacy and overconfidence bias in debt markets 99

behave sub-optimally: they trade (buy and sell securities) too often, which has an
adverse effect on their returns (Barber and Odean, 2001; Chuang and Lee, 2006;
Deaves et al., 2009; Glaser and Weber, 2007). The negative influence of overconfidence
on investment performance has also been confirmed by Biais et al. (2005), Fenton-
O’Creevy et al. (2003), Statman et al. (2006) and Nosić and Weber (2010). Verma (2017)
confirms that overconfident consumers are more likely to make imprudent financial
decisions, irrespective of their actual financial literacy. Some findings suggest
that overconfidence may induce risk-seeking behaviour. For instance, Camerer and
Lovallo (1999), in an experimental setting, show that overconfidence leads to excessive
business entry, while Simon and Houghton (2003) find a positive association between
overconfidence and the extent to which product introductions are pioneering (i.e., risky).
This study also shows that managers introducing pioneering products were more likely
to be certain that the products would achieve success, although the products were
actually less likely to succeed. Further, financially overconfident individuals have been
found to be the most reluctant to seek formal financial advice (Gentile et al., 2016;
Kramer, 2014). From a psychological perspective this is understandable, because they
overstate their capabilities and this leads them to a conviction that they can manage
without advice.
On the other hand, little is known about the impact of overconfidence on the
behaviour of consumers in debt markets. Ausubel (1999) reports that credit card
customers are more responsive to changes in the introductory interest rate than to
monetary-equivalent adjustments in the post-introductory interest rate. Shui and Ausubel
(2005) and Heidhues and Koszegi (2010) attribute this to overconfidence about the ability
to refinance debt to avoid post-introductory rates. In an experimental setting,
Kriete-Dodds and Maringer (2015) have shown that overconfidence leads to negative
debt-related effects: more ‘accidental’ borrowing and higher interest rates.
Based on these previous studies showing that overconfidence may induce risk-
seeking behaviour and lead to poor financial decisions, we formulated the following two
hypotheses:

H1: Overconfident individuals are more likely to participate in the debt market.

H2: Overconfident individuals are more likely to demonstrate unhealthy debt behaviour.

The first hypothesis rests on two distinct assumptions. First, previous studies have
suggested that confidence reduces hesitation and induces action (Parker et al., 2012).
Hence, overconfident individuals should face particularly weak barriers to entry into the
debt market. Second, debt imposes additional risk on consumers’ income and wealth.
Given that overconfidence may push an individual to take more risk, as indicated earlier
in this section, an overconfident individual should be more likely to enter debt market.
The other hypothesis stems directly from the rich empirical evidence presented above,
which suggests that overconfidence may foster poor financial decisions and unhealthy
financial behaviour. As a result of overconfidence, individuals may make biased
estimates regarding the expected costs and benefits of credit or a loan, may overrate their
understanding of contractual terms, and may overstate their abilities to manage such
products in the future.
100 A. Cwynar et al.

3 Method

3.1 Data
We conducted the questionnaire-based survey during the period from 10–13 November
2018. The data were collected using computer-assisted web interviewing (CAWI) from a
sample of 600 Poles aged 18–35 years. We partnered with a professional market and
opinion research agency, DRB Polonia, to conduct the survey. To obtain a sampling
frame we used the database provided by the Central Statistical Office which contains
detailed information on the Polish population, including the information on how the
population is divided into different age groups. The response rate reached 44.8%. The
sample was controlled by cross-section quotas for two demographic variables: gender and
place of residence.

3.2 Measures for overconfidence in debt literacy

We measured debt literacy overconfidence as the over-optimistic perception of one’s debt
literacy, that is, the overestimation of one’s self-assessed debt knowledge. To estimate
this overconfidence we first measured the respondents’ actual level of debt literacy and
their self-assessments of this level (treated as a proxy for debt-related financial
confidence). To measure the actual debt literacy (OLIT, for ‘objective literacy’), we
applied a 13-question test comprising two parts:
1 a debt knowledge ‘true/false’ test [nine factual questions; four of them adopted from
Hilgert et al. (2003) and the others developed by the authors]
2 a debt skills test, which was an extended version of the instrument developed by
Lusardi and Tufano (2015) [four single-choice questions; three questions adopted
from Lusardi and Tufano (2015), and one developed by the authors].
Each correct answer was coded as ‘1’, while each incorrect answer, as well as each
‘Don’t know’ response, was coded as ‘0’. Overall, the debt literacy index used in this
study ranges between 0 and 13 in value (see Appendix for details on the debt literacy
test).
Both the test developed by Hilgert et al. (2003) and the test proposed by Lusardi and
Tufano (2015) have previously been validated on large representative samples in the
USA. We used only some of the items included in the original instrument of Hilgert et al.
(2003) and discarded the others, because the others refer to financial matters not related
to debt, and we were striving to capture the role of overconfidence in the borrowing
domain. For the same reason, that is, to make the final instrument cover as wide a range
of (exclusively) debt-related issues as possible, we added the fourth question to the
original test of Lusardi and Tufano (2015). This decision was motivated by the belief that
the original test does not take into account the important issue of the timing of
debt-entailed payments.
The respondents’ self-assessments of their own debt literacy (SLIT, for ‘subjective
literacy’) were measured with a 5-point Likert scale. The variable came from the survey
item that asked: ‘On a scale of 1 to 5, where 1 means very low and 5 means very high,
how would you assess your debt knowledge?’ This question preceded the objective
diagnosis of the debt literacy based on the aforementioned 13-question test. Financial
 Young adults’ financial literacy and overconfidence bias in debt markets 101

literacy confidence is routinely measured in this way in the literature (see, e.g., Allgood
and Walstad, 2016; Cwynar et al., 2018; Lusardi and Tufano, 2015; Porto and Xiao
2016).
We used two operationalisations of overconfidence in financial literacy. First, we
adopted the approach of Xia et al. (2014), which was also applied by Porto and Xiao
(2016) and Gentile et al. (2016), to gauge overconfidence in debt literacy. The following
classifier was used in this approach: a respondent is overconfident if, for that respondent,
OLIT ≤ sample mean and SLIT > sample mean. This measure of overconfidence was
labelled OVER1 in our analyses. The measure was coded as a binary variable
(overconfidence = 1; otherwise = 0). Second, we introduced a novel instrument of
overconfidence (labelled OVER2) measuring it as an ordinal variable on a scale from 0 to
100 based on the comparison of percentiles in the distribution of objective literacy and
subjective literacy. More specifically, our new measure of overconfidence assigns
respondents the number calculated as a difference between the respondent’s percentile of
subjective literacy and his or her percentile of objective literacy when the difference is
positive, and zero otherwise. We applied the additional measure of overconfidence as a
robustness check, because the basic binary measure used in the previous literature may be
perceived as too general and arbitrary (Porto and Xiao, 2016) and as such it may not
ensure the sufficient insight into this phenomenon.

3.3 Debt market-related variables

We employed two variables to examine the survey participants’ activity in the credit
market. First, we checked whether they had ever borrowed, by asking them to report if
they had ever been in debt, regardless of the form of debt. This binary variable
(PARTICIP, for ‘participation in the debt market’) allowed us to separate borrowers
(coded as ‘0’) from non-borrowers (coded as ‘1’). Second, those who reported that they
had borrowed were asked to self-report on their debt behaviour (BEHAV). By debt
behaviour we mean how individuals transact in debt markets or, in other words, how they
borrow (i.e., for what purposes they borrow, do they make a ‘comparison shopping’ when
looking for a loan, do they pay off debts timely, etc.) assuming that such ‘debt behaviour’
– as the behaviour in any other domain – may be more or less unhealthy (unbeneficial,
unsustainable, undesired). Specifically, we asked respondents to indicate on a five-point
scale how often [from 1 (never) to 5 (always)] they had performed each of the five
unhealthy debt behaviours forming our debt behaviour scale. The development of this
instrument for measuring debt behaviour was demonstrated in detail in Cwynar et al.
(2019). The exact items forming our debt behaviour index are demonstrated in the
Appendix (Q23 of the questionnaire).
We designed a new instrument to measure debt behaviour, because the existing
literature has produced only general financial behaviour scales (see, e.g., Dew and Xiao,
2011). Moreover, the existing scales are not adjusted to the Polish environment (e.g., they
are skewed towards credit card debt, which is common in the US but not so common in
Poland). Our initial scale comprised a combination of healthy and unhealthy debt
behaviours. However, given that the pilot study indicated that healthy behaviours had a
negative effect on the scale’s consistency, we decided to convert them into their
unhealthy counterparts. Hence, it should be borne in mind when interpreting the BEHAV
values that a higher value means more unhealthy debt behaviour. Although this may raise
102 A. Cwynar et al.

concerns regarding the reliability of the respondents’ reports, the literature shows that
individuals meaningfully report even on their sub-optimal characteristics (Ameriks et al.,
2007; Gathergood, 2012).

3.4 Control variables

Finally, we used standard socio-demographic and economic features as control variables
in our regressions: sex (GENDER), age (AGE), educational attainment (EDUCAT), place
of residence (RESID), income (INCOME), and marital status (MSTATUS).

3.5 Analytical procedure

We applied four logit models, with credit market participation as the predicted variable
and debt literacy overconfidence as the potential predictor. These logistic regressions
were estimated for the entire sample (n = 600). We also estimated four linear regression
models, with debt behaviour as the explained variable and debt literacy overconfidence as
the potential predictor. The linear models were estimated using only the data for those
respondents who reported that they had borrowed money at least once in their life so far
(n = 395). To control for the effect of socio-demographic variables on credit market
participation and debt behaviour, we checked how the inclusion of the socio-demographic
variables in the model affects the percentage of variation that is explained by this model.

4 Results

4.1 Descriptive statistics

Table 1 reports the descriptive statistics for the full sample (except BEHAV, for which
n = 395), while Table 2 reports the statistics for the subsample of those respondents who
took out a loan at least once. The statistics reveal large shortcomings in debt literacy,
coupled with a prevalence in the sample of those who perceive their debt knowledge to
be good. The share of overconfident respondents in the full sample is 21%. Compared to
other similar studies focused on the role of overconfidence, the size of this segment is
similar to that found by Xia et al. (2014) (23.9%), and significantly higher than that found
by Porto and Xiao (2016) (11.6%). The share of those who had never borrowed in the
studied sample is slightly more than a third. Both the mean and the median for debt
behaviour show that the sampled respondents reported that they engaged in – on average
– healthy behaviour.
Table 1 Descriptive statistics for used variables (except controls); full sample (n = 600)

Min Max Arithmetic Standard Variability index

Variable Median
value value mean deviation (%)
OVER1 0 1 0.21 0 0.41 0.17
OVER2 0 100 37.29 37.50 21.88 478.91
PARTICIP 0 1 0.34 0 0.48 0.23
OLIT 0 8 2.46 2 1.55 2.40
SLIT 1 5 3.36 3 0.98 0.95
 Young adults’ financial literacy and overconfidence bias in debt markets 103

Table 2 Descriptive statistics for used variables (except controls); subsample of those
respondents who borrowed at least once (n = 395)

Min Max Arithmetic Standard Variability index

Variable Median
value value mean deviation (%)
OVER1 0 1 0.24 0 0.43 0.18
OVER2 0 100 39.65 42.5 22.36 499.94
BEHAV 6 25 13.09 13 4.55 20.68
OLIT 0 8 2.48 2 1.64 2.69
SLIT 1 5 3.50 4 0.93 0.87

4.2 The link between overconfidence and debt market participation

Table 3 reports the estimation results for the logit model estimated for entire sample,
with debt market participation as the dependent variable and overconfidence (measured
as OVER1) as the diagnostic variable, along with the socio-demographic traits as
controls (Model 1). The Hosmer and Lemeshow test turned out to be insignificant for
the model [χ2(8) = 1.59; p = 0.991], indicating that it is well-fitted to the data. The
estimates of the model are also statistically significant [χ2(10) = 83.91; p < 0.001] and the
model explains about 13% of the dependent variable’s variation. The signs at the
non-standardised regression coefficient (B) inform about whether the relationship
between diagnostic variable and dependent variable is positive or negative. Wald test (Z)
indicates whether the relationship is statistically significant. In the model, overconfidence
is significantly and inversely related to credit market participation, indicating that
overconfident participants are more likely to borrow. The odds ratio (0.634) means that
overconfident respondents are almost 37% less likely to be classified in the ‘never
borrowed’ group.
The overconfidence remained statistically and inversely related to debt market
participation after removing all the control variables from the model (see Model 2 in
Table 3).
Table 4 reports the estimation results for the logit model estimated for entire sample
with debt market participation as the dependent variable, however with the other measure
of overconfidence (that is, OVER2) as diagnostic variable along with sociodemographic
traits as controls (Model 3). The Hosmer and Lemeshow test turned out to be
insignificant for the model [χ2(8) = 3.80; p = 0.875], indicating that it is well-fitted to
data. The estimates of the model are statistically significant [χ2(10) = 83.91; p < 0.001]
and the model explains about 15% of the dependent’s variable variation. The
overconfidence is significantly and inversely related to debt market participation in the
model, indicating that overconfident participants are more likely to borrow, in the same
way as in Model 1 with OVER1. The odds ratio (0.985) means that overconfident
respondents have almost 1.5% less odds to be classified as ‘never borrowed’ individuals.
The overconfidence remained statistically and inversely related to debt market
participation after removing all control variables from the model (see Model 4 in
Table 4). Overall, the estimation results from Model 1, Model 2, Model 3 and Model 4
support our H1.
104 A. Cwynar et al.

Table 3 Results from logistic regressions (debt market participation as the dependent variable;
OVER1 as the diagnostic variable)
B SE Z Exp(B) Cl 95%
Model 1 OVER1 –0.455 0.227 4.035* 0.634 0.407–0.989
GENDER 0.371 0.178 4.330* 1.449 1.022–2.056
AGE –0.044 0.018 6.059* 0.957 0.924–0.991
EDUCAT 0.123 0.066 3.486 1.131 0.994–1.287
RESID 0.014 0.042 0.115 1.014 0.934–1.102
MSTATUSa 6.861
MARRIED 0.025 0.545 0.002 1.025 0.352–2.984
SINGLE 0.142 0.467 0.092 1.152 0.461–2.878
IN RELATION –0.441 0.516 0.730 0.644 0.234–1.769
DIVORCED/ –0.611 0.951 0.413 0.543 0.084–3.498
SEPARATED
INCOME –0.105 0.063 2.741 0.901 0.796–1.019
Cox and Snell R-squared 0.131
Nagelkerke R-squared 0.174
Χ2 83,906***
Model 2 OVER1 –1.017 0.200 25.822*** 0.362 0.244–0.535
Cox and Snell R-squared 0.048
Nagelkerke R-squared 0.063
Χ2 29.258***
Notes: B – non-standardised regression coefficient; SE – standard error; Z – Wald test;
Exp(B) – odds ratio; Cl 95% – confidence interval; significance levels: *p < 0.05;
** p < 0.01; ***p < 0.001; a – the reference category is ‘widow/widower’.
Table 4 Results from logistic regressions (debt market participation as the dependent variable;
OVER2 as the diagnostic variable)

B SE Z Exp(B) Cl 95%
Model 3 OVER2 –0.016 0.004 14.000*** 0.985 0.977–0.993
GENDER 0.383 0.180 4.535* 1.466 1.031–2.086
AGE –0.040 0.018 4.790* 0.961 0.928–0.996
EDUCAT 0.125 0.067 3.511 1.133 0.994–1.292
RESID 0.012 0.042 0.084 1.012 0.932–1.110
MSTATUSa 7.764
MARRIED 0.351 0.565 0.385 1.420 0.3469–4.299
SINGLE 0.464 0.486 0.909 1.590 0.613–4.125
IN RELATION –0.133 0.534 0.062 0.875 0.307–2.495
DIVORCED/ –0.372 0.967 0.148 0.689 0.104–4.587
SEPARATED
INCOME –0.094 0.064 2.175 0.910 0.803–1.031
Notes: B – non-standardised regression coefficient; SE – standard error; Z – Wald test;
Exp(B) – odds ratio; Cl 95% – confidence interval; significance levels: *p < 0.05;
**p < 0.01; ***p < 0.001; a – the reference category is ‘widow/widower’.
 Young adults’ financial literacy and overconfidence bias in debt markets 105

Table 4 Results from logistic regressions (debt market participation as the dependent variable;
OVER2 as the diagnostic variable) (continued)

B SE Z Exp(B) Cl 95%
Cox and Snell R-squared 0.145
Nagelkerke R-squared 0.194
Χ2 94.161***
Model 4 OVER2 –0.017 0.002 65.958*** 0.983 0.979–0.987
Cox and Snell R-squared 0.116
Nagelkerke R-squared 0.155
Χ2 74.289***
Notes: B – non-standardised regression coefficient; SE – standard error; Z – Wald test;
Exp(B) – odds ratio; Cl 95% – confidence interval; significance levels: *p < 0.05;
**p < 0.01; ***p < 0.001; a – the reference category is ‘widow/widower’.

4.3 The link between overconfidence and debt behaviour

Table 5 reports the estimation results of multiple linear regressions for the subsample of
borrowers (n = 395), with debt behaviour as the dependent variable and overconfidence
(measured as OVER1) as the diagnostic variable, along with socio-demographic traits as
controls (Model 5). The model is well-fitted to the data [F(7.387) = 3.872; p < 0.001] and
explains 6.5% of the variation in debt behaviour (R-squared = 0.065; adjusted R-squared
= 0.049). The model shows that overconfidence is not significant as a predictor of debt
behaviour.
The overconfidence remains statistically insignificant after removing all the control
variables from the model (see Model 6 in Table 5). At the same time, the Model 6 with
OVER1 as the only predictor is insufficiently fitted to data [F(1.393) = 1.050; p = 0.306].
Table 5 Results from linear regressions (debt behaviour as the dependent variable; OVER1 as
the diagnostic variable)

Non–standardised Standardised
Cl 95%
coefficients coefficients t
B SE Beta LL UL
Model 5 OVER1 0.330 0.530 0.031 0.622 –0.713 1.372
GENDER –0.314 0.457 –0.034 –0.686 –1.213 0.586
AGE –0.124 0.047 –0.137 –2.625** –0.217 –0.031
EDUCAT –0.143 0.167 –0.046 –0.855 –0.472 0.186
RESID –0.107 0.112 –0.049 –0.955 –0.328 0.114
MSTATUS –0.006 0.249 –0.001 –0.023 –0.495 0.484
INCOME 0.657 0.159 0.213 4.126*** 0.344 0.970
Model 6 OVER1 0.551 0.537 0.052 1.025 –0.506 1.607
Notes: B – non-standardised regression coefficient; SE – standard error; Beta –
standardised regression coefficient; t – t test; significance levels: *p< 0.05;
**p < 0.01; ***p < 0.001.
Table 6 reports the estimation results of multiple linear regressions for the subsample of
borrowers (n = 395) with debt behaviour as the dependent variable, however with
106 A. Cwynar et al.

overconfidence operationalised as OVER2 and used as the diagnostic variable along with
sociodemographic traits as controls (Model 7). The model is well-fitted to data [F(7.387)
= 4.631; p < 0.001] and explains 6.1% of debt behaviour variation (R-squared = 0.077;
adjusted R-squared = 0.061). The model shows that overconfidence is significant as
predictor of debt behaviour. The estimates show that the one-unit increase in OVER2 is
associated with the increase in the value of debt behaviour index by 0.023 units in
Model 7 and by 0.028 units in Model 8.
Overall, the estimation results from Models 5, 6, 7 and 8 are mixed. Some of them
confirm our H2 (Models 7 and 8 with OVER2 as the diagnostic variable), while the
others do not (Models 5 and 6 with overconfidence measured as OVER1).
Table 6 Results from linear regressions (debt behaviour as the dependent variable; OVER2 as
the diagnostic variable)

Non–standardised Standardised
Cl 95%
coefficients coefficients t
B SE Beta LL UL
Model 7 OVER2 0.023 0.010 0.114 2.314* 0.003 0.043
GENDER –0.316 0.454 –0.034 –0.696 –1.209 0.577
AGE –0.122 0.047 –0.134 –2.599* –0.215 –0.030
EDUCAT –0.146 0.166 –0.047 –0.876 –0.473 0.181
RESID –0.099 0.112 –0.045 –0.883 –0.318 0.121
MSTATUS –0.026 0.247 –0.005 0.106 –0.459 0.511
INCOME 0.630 0.158 0.205 3.973*** 0.318 0.941
Model 8 OVER2 0.028 0.010 0.136 2.716** 0.008 0.048
Notes: B – non-standardised regression coefficient; SE – standard error; beta –
standardised regression coefficient; t – t test; significance levels: *p < 0.05;
**p < 0.01; ***p < 0.001.

5 Discussion, conclusions and future research

Our survey indicates that about one third of the sampled participants were non-borrowers:
they reported that they had never borrowed money. For comparison, the KRD Economic
Information Bureau (2018) states that more than three-quarters of grown-up Poles report
that they have entered into at least one credit agreement or loan. However, our sample
comprised only young adults – aged at most 35 years. Compared to the nationally
representative sample of the entire population, our sampled respondents had less time to
acquire debt-related experiences. One of our logit models confirmed that the likelihood of
debt market participation increases with age. Hence, the distribution of our sample into
borrowers and non-borrowers in the proportion 2-to-1 seems to be a credible and
convincing estimate.
Our study shows that overconfidence increases the odds of participating in the debt
market, possibly because overconfident individuals, more often than those who are not
overconfident, assume optimistically that they will be able to navigate credit contracts
effectively, despite the underlying risk. To a degree, this result is similar to the one
obtained by Xia et al. (2014), who showed that financial literacy overconfidence is
 Young adults’ financial literacy and overconfidence bias in debt markets 107

positively correlated to stock market participation. In both cases – the stock market and
the debt market – we are dealing with a market that can stimulate wealth creation and
accumulation, but at the same time a market in which participation entails considerable
risk. The issue that is key to successful participation is the specific behaviour in the
relevant market. Unlike Xia et al. (2014), who did not study the related behaviour among
those who reported stock market participation, we examined the debt behaviour of those
who borrowed, and we checked the link between this behaviour and overconfidence.
We obtained mixed results regarding this link. The simple binary measure of
overconfidence which is widespread in the financial literacy literature turned out to be
insignificant as the predictor of debt behaviour. However, application of the other
measure of overconfidence – that is, the quantitative one – brought results that are in line
with relations hypothesised in this article: more overconfident respondents were more
likely to perform unhealthy debt behaviours. The latter is consistent with evidence on the
association between overconfidence and financial asset-related behaviour (e.g., Barber
and Odean, 2001; Glaser and Weber, 2007; Nosić and Weber, 2010). As predicted,
overconfident individuals may make biased estimates regarding the expected costs and
benefits of credit or a loan, may overrate their understanding of contractual terms, and
may overstate their abilities to manage such products in the future.
Future researchers should aim to explore and understand how overconfidence
determines credit market participation and, particularly, further verify whether
overconfidence translates into poor debt decisions. Our analysis showed that the
regression results with debt behaviour as the outcome variable may be sensitive to the
choice of the instrument measuring overconfidence. Such effect is discussed in the
related literature. For instance, Lyons et al. (2007) showed that the regression results with
the division of financial decision-making power between partners as the predictor may be
strongly sensitive to the choice of the instrument measuring the division. Therefore, we
recommend more detailed and in-depth studies of overconfidence using different forms
of the concept – from miscalibration to over-placement – and different
operationalisations of overconfidence. Future studies should also test other scales of
healthy debt behaviour in correlation with debt literacy overconfidence. Some items
forming our debt behaviour scale may be strongly related to biases other than
overconfidence. For instance, the third item (‘Borrowing money for at least one of the
following purposes (or for similar purposes): the purchase of expensive clothing or
haberdashery accessories (e.g., a branded suit or purse), a holiday abroad, technological
novelties or gadgets (e.g., the newest model of a cult fashionable brand of smartphone)’)
may be strongly linked to such psychological dispositions as self-control, the need of for
instant gratification or impatience – all of which may lead to compulsive (and sometimes
debt-driven) buying. Finally, as usual, our data may be influenced by the effects of social
desirability (e.g. the respondents might have had an incentive to obscure some of their
characteristics – such as the fact that they borrowed, or the unhealthy nature of their debt
behaviour – in their self-reports). Hence, future studies should strive to match market
data on credit behaviour with refined estimates of overconfidence.
Our study may have a value in terms of policy implications. Given that the most
natural approach to financial literacy support is targeted education, the policy framework
should take into account the specific features of overconfident consumers as potential
recipients of such education. The key challenge in designing educational programmes for
this group may be to find a way to convince the overconfident individuals that they
108 A. Cwynar et al.

actually know significantly less than they think they do. Perhaps psychological support
would be appropriate in this respect.

Acknowledgements

This work was supported by Polish Ministry of Science and Higher Education grant
[contract no. 0057/DLG/2016/10 under the program ‘Dialogue’ (within project entitled
‘Debt Watch’)].

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Appendix

Survey questionnaire
Q11 On a scale of 1 to 5, where 1 means very low, 2 – low, 3 – average, 4 – high,
5 – very high, indicate how would you rate your overall knowledge with respect to
credits and loans?
Q12 Based on your knowledge, classify the following statements as true or false (note
that all of them regard Polish circumstances). If you don’t know whether they are
true or false, indicate “I don’t know”.
I don’t
True False
know
Creditors are required to tell you the APY you will pay when you get x
a loan.
Your credit rating is not affected by how much you charge on your x
credit cards.
If the interest rate on an adjustable-rate mortgage loan goes up, your x
monthly mortgage payments will also go up.
Total amount of interest on a 15-year mortgage is lower than total x
amount of interest on the same, however a 30-year mortgage.
A 15-year mortgage typically requires higher monthly mortgage x
payments than the same, however 30-year mortgage.
 Young adults’ financial literacy and overconfidence bias in debt markets 111

The most important thing to look at when comparing a loan or a credit offers is total x
amount of interest you will have to pay in the future.
Consumer can waive already granted loan during short-period of time after the day of x
grant.
Bank margin is another name for bank commission applied when granting loans to x
private individuals.
A list of warnings regarding dishonest lending institutions is maintained by the Polish x
National Bank.

Q13 Suppose you owe PLN 1,000 on your credit card and the interest rate you are
charged is 20% per year compounded annually. If you didn’t pay anything off, at
this interest rate, how many years would it take for the amount you owe to double?
1 2 years
2 Less than 5 years (correct)
3 Between 5 and 10 years
4 More than 10 years
5 Do not know
Q14 You owe PLN 3,000 on your credit card. You pay a minimum payment of PLN 30
each month. At an Annual Percentage Rate of 12% (or 1% per month), how many
years would it take to eliminate your credit card debt if you made no additional
new charges?
1 Less than 5 years
2 Between 5 and 10 years
3 Between 10 and 15 years
4 Never, continue to be in debt (correct)
5 Do not know
Q15 You purchase an appliance which costs PLN 1,000. To pay for this appliance, you
are given the following two options:
a Pay 12 monthly installments of PLN 100 each.
b Borrow at a 20% annual interest rate and pay back PLN 1,200 one year from
now.
Which is the more advantageous offer, in other words which one will cost less?
1 Option (a)
2 Option (b) (correct)
3 They are the same
4 Do not know
112 A. Cwynar et al.

Q16 You took a PLN 5,000 loan for one year and the interest rate you are charged is
10% per year. You are given the following two options to pay the interest on the
loan:
a One-time payment of PLN 500 in advance (at the beginning of the year),
which means that PLN 4,500 will be effectively available for you on the day
of grant.
b One-time payment of PLN 500 at the end of the year, which means that PLN
5,500 will have to be returned to the lender on the day of repayment.
Which is the more advantageous option?
1 Option (a)
2 Option (b) (correct)
3 They are the same
4 Do not know
Q23 On a scale of 1 to 5, where 1 means never, 5 – always, indicate the extent to which
you engage in the following behaviours (if you have never been in debt, report it
now):
1 Borrowing money without thorough examination of all pros and cons as well
as careful consideration of all available options
2 Borrowing money to repay former debts
3 Borrowing money for at least one of the following purposes (or for similar
purposes): the purchase of expensive clothing or haberdashery (e.g. branded
suit or purse), holiday abroad, technological novelties or gadgets (e.g. the
newest model of a cult brand smartphone)
4 Borrowing money simultaneously from more than one source (e.g. banks,
personal loan / payday loan companies, instalment purchases, pawnshops,
family etc.)
5 Getting behind on bills payment or/and debt repayment
Q31 Indicate your gender:
1 Female
2 Male
Q32 Indicate your year of birth
Q33 Indicate your educational attainment:
1 Grammar school (primary/elementary education)
2 Junior high school (lower secondary education)
3 Junior vocational school (lower vocational education)
4 High school (upper secondary education)
 Young adults’ financial literacy and overconfidence bias in debt markets 113

5 Vocational school (upper vocational education)

6 Post high school
7 Higher school
8 PhD
9 Other, which…….?
Q34 Indicate the size of your place of residence:
1 Village
2 Town up to 20,000 inhabitants
3 Town from 20,001 to 50,000 inhabitants
4 Town from 50,001 to 100,000 inhabitants
5 Town from 100,001 to 200,000 inhabitants
6 Town from 200,001 to 500,000 inhabitants
7 City of 500,0001 inhabitants or more
Q36 Indicate your marital status:
1 Single
2 Cohabitation
3 Married
4 Divorced
5 Widowed
Q39 Indicate your average monthly net income (in PLN) in your household in the
current year.
1 less than 1,500
2 1,500-2,500
3 2,500-3,500
4 3,500-4,500
5 4,500-6,000
6 more than 6,000