Skip to main content

Sit Down, Be Humble: Overconfidence & Investing

Image
By
man jumping on the middle of the street during daytime

We humans are notorious for overestimating our abilities. We're a cocky bunch. Let's take a look at how big our heads really are and its influence on our finances.

Apparently, We're All Above Average

A 1977 study found that 90% of college professors believed they had above average teaching abilities. With two-thirds believing they were in the top quartile.

A 1981 study found that 80%-90% of college students ranked their driving abilities as above average.

 A 2000 study found that 87% of Stanford MBA candidates believed their academic performance was above average.

So, we're all above average?

Obviously that can't be the case. Math doesn't work that way! These are examples of illusory superiority, the tendency for us to irrationally overestimate our abilities.

There are many more studies like these; demonstrating how we think we're more athletic, more beautiful, and have more potential than the "average person".

Overconfidence and Investing 

Overconfidence runs rampant in investing. We all think we're smarter, have better information, and are more skilled than the rest.

"Buy Telsa, trust me, you'll be rich."

 "The recession is coming, trust me, we're due, sell everything!"  

Nobody can predict the future. Thinking you can will just lead to poor decisions. People overly confident in their stock picking ability will fail to diversify properly. People who think they can time the market will end up sitting on cash, missing gains while they wait for a recession to come.

The cockiest among us tend to trade more, raking up unnecessary fees and exposing themselves to costly mistakes. A 2000 study examined thousands of accounts over a 5 year period and found that the more investors traded, the worse their performance. The most active traders earned an annual return of 11.4%, at a time when the market returned 17.9%. Not great.

 But I Do Really Well, I Swear! 

You might have had some success, sure. Even a broken clock is right twice a day. Given how unpredictable and competitive markets are, these fortunate events were most likely a result of luck rather than skill.

Investors have selective memories and irrational interpretations of outcomes. Remembering (and bragging about) the wins and conveniently overlooking losses (unless you're r/wallstreetbets). We tend to attribute wins as a display of skill, while losses as freak accidents.

We also suffer from hindsight bias. In hindsight, it's easy to convince ourselves that we knew the housing market would sky rocket and that Facebook would rise 400%. Hindsight bias contributes to overconfidence by making us think investing is more predictable and controllable than it really is.

Conclusion

It's easy to fall into the overconfidence trap. The key is to take a step back when assessing your skills and outcomes. Analyze with these biases in mind, question assumptions, and ask for second opinions. Doing this, you'll be able to dampen your inherit overconfidence to make more rational decisions. Stay humble out there.









Labels:

Comments

Post a Comment

Popular posts from this blog

Today's Special: Humble Pie

By
You champion a project, fight for an idea, and then...reality sets in. That churning in your stomach isn't butterflies, it's the realization you've missed the mark.  Pride will puff up your chest, and kick in the "defend at all costs" instinct. But arguing with the umpire never changed a call. Admitting you're wrong isn't a sign of weakness. It can strengthen your professional standing. In a world obsessed with the illusion of infallibility, the courage to adjust course is a breath of fresh air. It shows you're confident enough to be wrong, and adaptable enough to learn from it. Do your research, think critically, and stand behind your decisions. But when the data whispers (or screams) otherwise, don't be afraid to swallow that slice of humble pie. Be the first to acknowledge. Don't wait for someone to point out your mistake. Be open, take responsibility, and most importantly, focus on what you're going to do to address it. Don't dwell ...
Post a Comment
Read more

Starting Really Really Small

By
On your desk is one of the most intimidating sights known to man. A blank page. The prospect of filling it up with anything resembling decent seems insurmountable. Staring at the long road ahead fills you with anxiety and dread.  The first step is the most difficult. So we procrastinate. We " research ", we " prep ", we " plan ". We do everything except tackling the problem. We avoid the pain for as long as we can.  To make a blank page less intimidating. Tear it in half. There, half as scary, twice as easy. Still too much? Do it again. And again. Keep doing it until the task is so small that it's too easy not to do.  Getting starting is the hardest part. So make the hardest part as easy as possible. This doesn't guarantee amazing results, but it gets you in the game. You can't win if you don't play.  
Post a Comment
Read more

Why We Shouldn't Be Afraid of Ambiguity

By
Ambiguity. That fuzzy monster that chases us down darkened hallways, whispering doubts about our roadmap and feature sets. You know the feeling. You constantly wrestle with unknowns: Will users like this? Is this the right direction? Frankly, if you had a nickel for every time the answer wasn't crystal clear, well, you might actually want to chase that ambiguity down the hall. But here's the thing: ambiguity isn't your enemy. It's your dance partner. Innovation rarely happens in a land of perfect clarity. Sure, there's a time for well-defined processes. But when you're creating something new, there are bound to be more questions than answers. The key is to learn to waltz with the unknown .  Embrace the experiment. Don't be afraid to throw some spaghetti at the wall and see what sticks.  Focus on outcomes, not outputs. Don't get hung up on features. What problem are you trying to solve? How will you measure success? Get comfortable with "go...
Post a Comment
Read more