Investment 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.
Richard 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.
All of these lead to investment behaviors that kill investor returns with market timing and stock picking as the lead offenders.
How can you resist the very human tendency toward overconfidence? Here are some starting points:
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 – firstname.lastname@example.org