Financial Overconfidence and Financial Vulnerability: Evidence from the 2024 NFCS Data

This study will focus on the connection between financial overconfidence and financial vulnerability, using data from the 2024 FINRA National Financial Capability Study (NFCS). The main question was whether people who think they know more about money than they actually do would end up taking more financial risks. After applying Exploratory Factor Analysis, the study identified three key areas that include financial confidence, financial knowledge, and financial vulnerability. These were combined to create an overconfidence score that was then used in several prediction models. Five machine learning models were tested on ten random sample seeds. Among these tested models, XGBoost performed the best to have explained about 60% of the variation in financial vulnerability. To better understand the results, SHAP analysis was then applied to see which factors mattered most. Confidence turned out to be the strongest influence, followed by overconfidence and knowledge. Income and education had smaller effects. Surprisingly, the results did not show that overconfidence increases vulnerability. Instead, a moderate level of confidence actually tends to be financially protective, especially for people with lower knowledge levels. Overall, it was figured that confidence may act more as a form of psychological support than as a risk factor. This finding suggests that financial education should help people build both knowledge and self-belief.