Of all the biases that overpower an investor’s intellect, over-confidence is the most destructive. As history speaks, all the major mishappenings were a result of overconfidence. Be it the sinking of Great titanic or 2008 recession and the bubble burst, overconfidence was rooted deep down all these incidents.
According to Jonathan Burton, the author of Investment Titans claimed the Golden Rule of investing as: “Don’t be Overconfident. The rest is Commentary. Every investment mistake is rooted in overconfidence.” Overconfidence is considered to be the most significant of the cognitive biases which are built deeply in the structure of the human mind. There is a huge danger which lurks behind overconfidence be it investing or other major decisions of life.
Overconfidence in investing
As far as investing is concerned, every overconfident investor has invested and will invest a larger amount of money as compared to their conservative parts. Over-betting has been one of the major characteristics of a trending stock or funds. There is another aspect to being overconfident as well; an overconfident investor in the high and false hope of making wealth from a now under-performing fund will stick to it in the overestimation he had made earlier. This affects the portfolio adversely and eats up the wealth you have otherwise created.
The same was the case with Jet Airways wherein investors refused to withdraw their funds from Jet Airways stock as they did not believe and accept the fact such a big airline may fall. What happened left the world awestruck.
Behavioral characteristics of overconfident investors
“I am always Right.” is one trait that rules the mindset of every investor. 9 out of 10 investors s fail to recognize and accept the fact that they could go wrong somewhere. Overconfident investors trade far more than rational investors which lowers the expected utility of trade.
Overconfidence is like a misleading guide which gives us the nerve to embrace our vague misconceptions and leads to an investment behavior that is sub-optimal and destructive in the long run.
Why do people fall prey to the portray of overconfidence?
The basic reason behind falling prey to the narrative of overconfidence is that nobody wasn’t to be proven wrong. Neither in front of other people nor their own eyes. Another reason is nobody wants to confront uncertainty and hence the failure. Also, every overconfident person has very high standards of self-knowledge and intuition.
According to Don Moore, an expert n behavior, there are three ways in which the overconfidence can be manifested:
Overestimation is the bias where an investor thinks he is better than everyone else and has a far superior sense of judgment and estimation.
Overplacement is placing oneself over and above others. The mentality that you are better than others can leave you stranded and desolated.
Overprecision is the immoderate faith that you know the whole truth. It is being too meticulous to be real.
All these biases are not only harmful to an investor but ultimately lead to a downward trend. Overconfidence being the mother root of them all is poisonous o your investment portfolio and will leave you wondering went wrong because you would never be able to figure out your own good fault.
Be extremely vigilant and analytical before making any investment decisions. Do not view things and problems in isolation. Everything is related, you just need to figure out when and where to strike.