Behaviour
Overconfidence
Systematically overestimating your own knowledge, judgement and probability of being right.
How it works
Most people rate themselves above average at investing, which cannot be true. Overconfidence produces excessive trading, insufficient diversification and too much leverage.
Studies of brokerage records find the most active traders earn the worst net returns, and the gap is largely explained by costs generated by the activity itself.
Where it misleads people
A run of good outcomes in a rising market is nearly indistinguishable from skill, and it reliably increases position sizes just before conditions change.
Related terms
- Confirmation biasSeeking and believing information that supports what you already think.
- Hindsight biasBelieving after the fact that an outcome was obvious all along.
- Behaviour gapThe difference between what a fund returned and what its investors actually earned in it.
- Concentration riskThe risk that too much of your outcome depends on one holding, sector, country or currency.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.