Is Overconfidence Costing You?

Print Friendly

OSBON_017Investment overconfidence, that is. If you are managing your own investments overconfidence is very likely costing you. A lot. How can you tell? Just measure in dollars and cents how much you lost or failed to earn because you bought or sold the wrong security at the wrong time. Almost all wrong moves like these have their roots in overconfidence. Let’s take a closer look.

MistakeOverconfidenceRichard Thaler, widely considered the father of behavioral finance and author of the recently published Misbehaving was asked in a Vanguard interview about the biggest mistakes investors make. The top two: overconfidence and loss aversion; both demonstrably lower returns. He said men suffer from this syndrome more than women. (Guilty here as charged, but reformed since 2005.)

Not you, you say? Check yourself against the thought patterns below.

Signs of investment overconfidence

  • Belief in your ability to consistently and reliably predict the future
  • Belief that you can see trends and opportunities that others don’t
  • Belief that successful investing is “easy”
  • Belief that you can get and act on crucial information before anyone else
  • Belief that you are just plain smarter, more analytical, or more logical than everyone else when it comes to money
  • Reliance on hunches, feelings and “gut” investment decisions
  • Unwillingness to keep track of your full record, remembering only your wins

All of these lead to investment behaviors that kill investor returns with market timing and stock picking as the lead offenders.

Antidotes to investment overconfidence

How can you resist the very human tendency toward overconfidence? Here are some starting points:

Create a buffer

It’s difficult to change how you think. If the tips above don’t do the trick, the surest shield against overconfidence’s costly performance drain is to pass control of your portfolio to an independent, unbiased advisor who will make investment decisions for you based on science and rigor, not speculation or hunch.

Important: Keep in mind that not all advisors work this way. Many think they can outsmart the market and will want to let you in on their latest hot stock, undetected trend, undervalued gem or seemingly reasonable ‘bet’. That does nothing but replace your overconfidence with theirs.

John Osbon –


This article intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice. Various factors could cause actual results or performance to differ materially from those discussed in forward-looking statements contained herein.

Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. 

Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.

Unless otherwise indicated, reference to any vendors, investment managers or funds are purely illustrative and should not be construed as endorsements of their services or offerings.  These references should not be interpreted to mean that comparable services can’t be found elsewhere.