Overconfidence bias or overconfidence in general expression can be summarized as an unfounded belief in one’s cognitive abilities, judgments, and intuitive reasoning. The concept of superstition has been explored in a wide range of cognitive psychological tests and experiments, which show that people overestimate both their ability to predict and the accuracy of the information provided to them.
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They also have poor performance in estimating probabilities, and events that he considers certain are often much less likely to occur. In short, most people think they are smarter than they really are and believe they have better information. For example, hearing the confidential news from a financial advisor or reading an article on the Internet, they are immediately ready to act on their information advantage, ready to act on their information advantage. For example, they decide quickly on an investment.
Technical description of the superstitious
Numerous studies have shown that investors are overconfident in their ability to invest. In particular, they have very narrow confidence intervals in their predictions. This type of overconfidence can be called predictive overconfidence. For example, when estimating the value of a stock, overconfident investors consider a very low percentage deviation for the expected range of returns, such as something like a 10% profit or loss, while existing experiences suggest a larger standard deviation. it shows. The implication of such behavior is that investors underestimate the risk of losing the original capital. (Naturally, there is no need to worry about the other side of the risk, rising value.)
Also, most investors are very confident about their judgments. We call this kind of overconfidence. For example, when deciding to invest in a particular company, they often ignore the expectation of a loss and later feel surprised or dissatisfied if the company performs poorly. These people often make large trades and acquire portfolios that are not diverse enough.
Practical application of supra-trust bias
A classic example of the over-confidence of investors in forecasting are former executives or famous family heirs of companies such as Johnson & Johnson, ExxonMobil or DuPont. These investors often refuse to diversify their assets because they claim to have confidential information about the company or to have an inseparable emotional attachment to it.
They are by no means willing to accept the fact that such an investment is risky. However, there are dozens of well-known companies that once symbolized the United States stock market, such as AT&T, which have declined significantly today or have virtually disappeared.
Tips for understanding and resolving superstitious bias
- Overconfident investors overestimate their ability to evaluate a company as a subject of investment. As a result, they ignore the negative information, which is naturally a warning sign that the stock should not be bought or should be sold if it is bought.
- Over-confident investors as a result of believing that they have special information (which others do not have) make large trades. Experience shows that doing a lot of trading, even in highly reputable brokerages such as Forex Brokers, often leads to poor long-term returns.
- Overconfident and overconfident investors do not know or care about the historical performance of their investment, so they may underestimate the risk of losing their principal, resulting in usually poor performance. And an unexpected portfolio awaits them.
- Overconfident investors have diversified portfolios. Hence, they bear more risk without a proportionate change in risk-taking capacity. These investors often do not even know that they have taken more risk than they can handle.
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