The overconfidence bias
Ciosa Garrahanon 04 November, 2014 at 05:11
Research has constantly shown that people tend to have unjustified confidence in their abilities and decisions. For example, 80% of people think they are above average drivers whilst 87% of MBA students in Stanford University rated their academic performance as above average.
This of course can’t be true as by definition, assuming a normal distribution, 50% of drivers and MBA students are below average. This bias effects people from all walks of life such as chief executives, lawyers, nurses and students as it is bias that is in built in our psyche. Behavioural finance has shown that this bias can lead to real problems for investors as many investors fall into the trap of believing they can pick winning investments. As a result, they sometimes put too much of their wealth in a single pot, which can be very risky. Research shows that picking winning investments is incredibly hard to do even for professional investors. Investors suffering from their overconfidence bias and therefore have too much confidence in their skills have also been found to buy and sell too often, which can have a negative effect on their returns.
In fact, research shows that those who buy and sell often were at a disadvantage compared to those who take a long-term view. This bias is possible to overcome by accepting a little bit of humility and allowing yourself to take advice from others.