Overconfidence

$4.00

20.00 $ earned

1479 views

Click to zoom in
BB trader
BB trader added a new post
10 months ago

Psychological research has indicated that there is a self-attribution bias in decision-making. When an
investment is successful, the investor believes that it is due to his or her skill. An unsuccessful investment is
seen to fail as a result of bad luck or the actions of others. The self-attribution bias leads to overconfidence.
Overconfidence is also reinforced by the hindsight bias, which a false belief is held by people who know the
outcome of an event that they would have predicted the outcome. Overconfidence may be particularly
characteristic of inexperienced investors who find that their initial investments are profitable. Their belief in
their own skill leads them to invest more. Thus, a bull market can generate overconfidence, which causes more
investing, thereby reinforcing the upward price movement. There are those who interpret their gains in a bull
market as arising from their own skill. They see certainty where there is uncertainty. This can lead them to
invest beyond a rational level, and painful losses result when the market falls.
Overconfidence can arise from excessive confidence in the quality of one’s information and an exaggerated
view of one’s ability to interpret that information. This leads to an unwarranted degree of certainty about the
accuracy of one’s forecasts and a corresponding underestimation of risk (Barber and Odean, 1999). As a
consequence, overconfident investors are prone to invest to a greater extent than would be the case if they
properly understood the quality of their forecasts. Barber and Odean (1999) found that overconfident investors tend to take more risks than less confident investors do.
During the bull market, individual investors increased their levels of trading. Investors allocated higher
proportions of their portfolios to shares, invested in riskier stocks (often technology companies), and many
investors borrowed money in order to increase their shareholdings (Barber and Odean, 2001). It is likely that,
during the bull market, individual investors attributed much of their success to their own expertise and became
overconfident as a result.

  • 5
  • Comment
    0
ADD IMAGE