Behavioral Bias: Overconfidence
“People are overconfident. Psychologists have determined that overconfidence causes people to overestimate their knowledge, underestimate risks, and exaggerate their ability to control events. Does overconfidence occur in investment decision making? Security selection is a difficult task. It is precisely this type of task at which people exhibit the greatest overconfidence.”
Relevant Quotes (Via Behavioral Finance Net):
“To understand speculative bubbles, positive or negative, we must appreciate that overconfidence in one’s own intuitive judgments plays a fundamental role.”
“There are two main implications of investor overconfidence. The first is that investors take bad bets because they fail to realize that they are at an informational disadvantage. The second is that they trade more frequently than is prudent, which leads to excessive trading volume.”
“Psychological studies show that most people are overconfident about their own relative abilities, and unreasonably optimistic about their futures (e.g. Neil D. Weinstein, 1980; Shelly E. Taylor and J. D. Brown, 1988). When assessing their position in a distribution of peers on almost any positive trait—like driving ability (Ola Svenson, 1981), income prospects, or longevity—a vast.
“No problem in judgment and decision making is more prevalent and more potentially catastrophic than overconfidence”.
Additional Papers On Overconfidence