Overconfidence Bias

When asked about their driving skills, 84% of college students rated themselves above average. Clearly, this is unlikely to be the case. In investing, the overconfidence bias manifests itself through excess trading, as the investor believes his ideas more accurate and better interpreted than everyone else’s.

In a study of discount brokerage trading, men were found to trade more than women, and the excess trading did not result in higher returns. In fact, the commissions resulted in lower net returns. This study supports a thesis that men are overconfident investors. Furthermore, the overconfidence results in selecting riskier stocks on average.

Source: Psychology of Investing, The (2nd Edition)

For more information, see all articles on: Active Management, Behavioral Finance, Investing in Stocks, Investment Returns, Portfolio Management, Research

See also:
  • Overconfidence and Confirmation Bias
  • Investor Overconfidence and Trading Volume
  • Psychological Traps in Investment Analysis
  • Escalation Bias
  • Hedge Fund Databases: Sample Selection Bias
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

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