The theme this week on the Retirement Quick Tips Podcast is: 5 Behaviors of Emotional Investors That Lead To Ruin
Today, I’m talking about Overconfidence Bias, which is mostly about thinking we’re better at something than we actually are.
When I was 6 years old, I thought I was going to be in the NBA…
Overconfidence when it comes to investing shouldn’t always be conflated with arrogance. I find that in reality there are very few arrogant investors, at least when it comes to their arrogance in their investment acumen. That’s some of what overconfidence bias isn’t about, but not all of it.
Overconfidence has two components: overconfidence in the quality of your information, and your ability to act on that information at the right time for maximum gain. Studies show that overconfident traders trade more frequently and fail to appropriately diversify their portfolios. - https://www.investopedia.com/articles/investing/050813/4-behavioral-biases-and-how-avoid-them.asp
Holding big stock positions and betting it all on just a single stock or a handful of stocks would be an example of overconfidence bias
How to overcome overconfidence bias: It goes back to the 2 components I just mentioned:
- Overconfidence in the quality of your information. No matter the source, no matter their authority or intelligence, they’re often just as wrong and clueless as you, so always remember that.
- Second is your ability to act on that information at the right time for maximum gain. You may be right occasionally and time things perfectly in life, but if you really pay attention and if you’re honest with yourself, you get it wrong all the time. So do I. I think the cure for this one is one of the hardest things any of us can do, which is become more humble, and much of which comes with age. Gandhi once said: “It is unwise to be too sure of one’s own wisdom”
I love this quote: the opposite of wisdom is to be sure of your own wisdom.
That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast.
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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance