your mind telling you that you know what you are doing and that things will
work out even though you have little experience and have done little research
or investigation. Overconfidence can lead you to trust your own decisions,
as well as your advisors, based on flimsy or nonexistent evidence. Overconfident
investors fail to scrutinize investment advisors, money managers,
mutual fund managers, realtors, journalists, and other supposed experts.
Many people with money to invest suffer from overconfidence. The
fact that you have money to invest tells your ego that you have a superior
intellect than those who have no money to invest. The mere fact of having
money to invest leads you to believe that you will invest it well.
However, overconfidence is not always the result of any prior success
or experience. Many investments are sold as simple, easy paths to riches.
This triggers overconfidence in inexperienced investors. The notion that
stocks are the best investment for the long-term led to overconfidence in
stocks for millions of investors. Without challenging this notion, investors
shifted money out of bonds and money market funds and into stocks. Overconfident
investors failed to ask how long the long-term is. If stocks are a
bad investment while you are saving for retirement and a worse investment
during your retirement, is it helpful if they are the best investment for the
next hundred years after your death?
Overconfidence can become the norm in investment bubbles. Investment
experts and the financial press were overconfident in stocks by the
end of the 1990s bull market.
Your overconfidence is used against you to sell investment products. If
you are a highly competent professional, your ego is likely to convince itself
that it is also going to be a highly competent investor. The combination of a
Realtor’s pitch and a professional’s ego has closed many strip shopping
center deals.
Any investment can trigger overconfidence if properly presented to the
client. Security and Exchange Commission (SEC) rules that only allow certain
investments to be sold to investors with large assets or large incomes
promote wealthy investors’ overconfidence in their ability to invest. Limited
partnerships are a typical trigger to overconfidence. High minimum investment
amounts and a limited number of shares available only to qualified
investors causes many deals to be sold without proper scrutiny.
The press can also lead the masses into overconfidence. Irrational
Exuberance by Robert Shiller explains in detail how the press, word of
mouth, and many other factors created the stock bubble of the late 1990s.
Many academic studies have demonstrated the effects of overconfidence
on investors. Despite studying overconfidence, some finance professors
never overcome it themselves.
Read More : Overconfidence In Trading
