Apparently having been around the block a time or two and having experienced both bull and bear markets help more seasoned investors to unlearn some of the overconfidence.
Mutual Funds
Maybe the solution to this problem is to have professionals invest your money. If you are considering this, remember that professional money managers are people too! They are subject to the same psychological influences as everyone else. Does their education and experience help them overcome the psychological influences of overconfidence?
Unfortunately, this may not be the case. Professional investors can be overconfident too. In fact, psychologists have shown that, in a field in which predicting the future is hard, as it is with investing, experts may be even more prone to overconfidence than novices.
Mutual funds are a good example. During the period from 1962 to 1993, stock mutual funds experienced an average annual turnover of 77%. For the funds delivering the best performance (the highest 10% of all funds) in one year, the turnover rate then increased to 93% the next year. A successful mutual fund begins trading more. Is this overconfidence or is it skill? Apparently it is overconfidence. Having success one year leads to overconfidence. This can be seen by the increase in turnover the next year.
The overconfidence also shows up in the returns. The average fund underperforms the market by 1.8% per year. Mutual funds cannot own too much of a firm (SEC rule). So if the fund has a lot of dollars to invest, it would have to buy larger firms to avoid breaking the SEC rule. These institutional investors also like to purchase risky stocks. Due to the large size of most institutional portfolios, professional money managers are forced to purchase the stock of large companies. However, they tend to pick the large stocks that have higher risk (measured in volatility)—again, a sign of overconfidence.
Read More : Overconfidence And Experience
