Much like the overconfident hare in the fable of “The Tortoise and the Hare”, people can well fall prey to the exaggerated notions of their own infallibility. Are you then, the tortoise or the hare, when it comes to handling your money or investing? What if we were to tell you that overconfidence bias can impact your investment decisions?
There is a very fine line of distinction between confidence and overconfidence. Overconfidence is the difference between ‘what you know’ and ‘what you think you know’.
A colleague of mine had no idea about investing and more specifically, about buying and selling stocks. It was during the regular lunch break discussions about the rising equity market, that he got fascinated with the idea of investing. What next? He started following the prices of stocks and in a trending market, he felt that he is successfully being able to predict the market movement.
The next logical step for him was to open a brokerage account with an equity broker. Kicked by his exuberance about the newly acquired skill, he started buying and selling stocks in small quantities. And his excitement knew no bounds when he started making some money. With the initial success he started to believe that he had the ability to predict the market. And that he had acquired a skill which could help him make money on a continuous and consistent basis. With the increased confidence he started taking bigger bets. But as equity markets do not behave rationally in the short run, there was an unforeseen event in the economy and his stocks started to fall. Seeing his portfolio in red, he had to exit all his positions and he lost faith in equity markets.
How do we then prevent ourselves from being overconfident about our financial decisions?
A financial decision demands a thorough review of attendant factors.
- Are you getting sold on something that is too good to be true?
- Are you being over enthusiastic? Optimism is good; but an excess of enthusiasm can be fraught with risk, because it involves haste and haste preempts caution.
- Do you have enough logical reasons for the financial decision you are about to take? Remember, each deal presents distinct challenges. Tackle them wisely and.
- Have you reflected enough on your past experiences and mistakes?
- Have you consulted an expert advisor for a second opinion on your decision?
Determining answers to these questions will serve to offset the ‘overconfidence bias’ into your investment patterns.
How do we help?
Overconfidence is largely a result of misjudging one’s own judgement. At CAGRfunds, we give you the “second opinion” that you might just be looking for. We not only conduct a FREE audit of your current portfolio, but also give you the right financial advice for all your future goals. We therefore ensure that you do not mistakenly take very concentrated exposures to a particular asset class.
Write to us at firstname.lastname@example.org for a FREE audit of your existing portfolio.