When Confidence and Knowledge Diverge: Investor Calibration and Portfolio Behavior

This study examines how the alignment between objective financial literacy and subjective financial knowledge shapes household investment behavior. Using Survey of Consumer Finances, we classify households as overcalibrated, undercalibrated, or well-calibrated. We analyze differences in stock market participation, risk tolerance, trading behavior, and portfolio diversification. Contrary to expectations, overcalibrated investors participate less frequently in equity markets and trade less than well-calibrated investors. Conditional on participation, however, they allocate a larger share of wealth to equities and hold more diversified portfolios. Undercalibrated investors exhibit lower participation rates and lower risk tolerance. These findings indicate that misalignment between perceived and actual financial knowledge produces investment patterns not explained by financial literacy or confidence alone. Incorporating calibration into behavioral finance provides a more complete understanding of household portfolio decisions.