Is it enough to be financially literate
Financial literacy is important for your financial well-being. How often have you come across this statement? Maybe too often!
In short, the idea to 'know finance' to make better investing decisions seems unquestionable. Or does it? A study done at the University of Pennsylvania suggests otherwise. As per it, there is a big downside of getting financially intelligent.
This is what it has to conclude. Financial intelligence increases the confidence levels in an investor which leads him to make worse investing decisions! The study reports - "...finance courses increase confidence, but this could reflect overconfidence..." It also cites an example - "Over-optimism and over-confidence in finance decision making is widespread.
In a 2005 survey, 65% of Americans believed they were 'very' or 'highly' knowledgeable about personal finance, although they performed abysmally on objective questions about the subject."
This sums up the reason why so many investors run into financial problems despite being financially intelligent. The idea of financial knowledge in isolation isn't enough. The need is to combine emotional intelligence with it as well.
As Warren Buffett once said, "Success in investing doesn't correlate with IQ once you're above the level of 25.
Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."