Overconfidence Bias

Overconfidence is one of the most widely documented biases. Many people believe they are better than average at tasks such as driving or investing, and they tend to be too sure that their forecasts are correct.

In investing, overconfidence can lead people to trade too often, believing they can pick winners or time the market. Research on individual investors has found that those who trade most frequently tend to earn lower returns after costs. Overconfidence can also lead to holding too few investments and taking on too much risk.

For example, an investor who made money on a few successful trades may conclude they have a special skill and start investing larger amounts in riskier positions, when their early success may have been mostly luck.

Overconfidence affects professionals too, including fund managers, analysts and company executives making acquisitions. Ways to counter it include keeping a record of predictions and results, seeking out opposing views, diversifying and using rules or systematic processes rather than relying solely on intuition.