Overconfidence Bias Flashcards
Too many people overvalue what they are not and undervalue what they are.
—Malcolm S. Forbes
SYDNEY OPERA HOUSE
The Opera house was estimated to complete in 4 years with a cost of AUS $7 million. Guess how long the construction took and how much did it cost? Take a wild guess.
The Sydney Opera house took 14 years after the first estimate with a final cost of AUS $ 102 million.
What is overconfidence?
As human beings, we like to feel good about ourselves.
We hate being looked down upon.
We like to win and feel the best.
The problem is, we consider ourselves as a part of the best even when we are not.
What is overconfidence?
• The tendency to overestimate our abilities and talent. We believe that we are better than what we actually are.
• A bias where the subjective confidence of your assumptions is greater than the objective accuracy.
• Overconfidence bias may lead clients to make risky investments.
• overestimation of one’s actual ability to perform a task successfully, by a belief that one’s performance is better than that of others, or by excessive certainty in the accuracy of one’s beliefs.
• Most of the new investors who are beginners to the investment world, are very overconfident
Barber & Odean
Types of Overconfidence
Overestimation
Overplacement
Over-precision
it is the belief that you are better at something than the reality of your skills or abilities would indicate. A person with this type of overconfidence overestimates what they are able to do.
Overestimation
it is the belief that you are better than other people. It involves comparing yourself to others with regards to a skill or ability and making the assumption (often erroneously) that you are better than the majority of other people at something.
Overplacement
It is a sense of certainty that you, more so than others, know the truth or reality of what is going to occur in the future. A person experiencing this kind of overconfidence erroneously believes they have some special insight that gives them an edge when it comes to knowing what is to come.
Over-precision
How does this can affect you?
• Estimating timelines
• Believing you do not need to learn because you are skilled
• Thinking you can do it
• I do not need to write it down
• Assuming you are better than the experts
Impact of overconfidence bias on your investment decisions
Overconfidence of investors generally misleads them, and they tend to ignore the actual risk involved in the investments because they often give importance to their prediction window.
Investors suffering from overconfidence usually believe that their choice of investment avenues is right, but this can often lead them towards low returns from their investment.
