oVERCONFIDENCE
‘Tendency to overestimate one's ability to predict and control future outcomes.’
We all tend towards overconfidence. It’s part of having a positive outlook on life, which can provide a buffer when things go wrong. In investment terms, overconfidence can lead to a belief in one’s ability to pick winners.
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One of the ways in which overconfidence can manifest itself is trading too often, but it rarely pays off:
- A US study found that more active traders earned the lowest returns. On average, new stocks bought underperformed the stock sold by 3%.
- A further study showed that people who were unable to feel emotions because of brain injuries made more money than people with healthy brains because they were less fearful.
The adage ‘It’s not ‘timing’ the market that matters, but ‘time in’ the market’ usually makes sense.