Overconfident Investing
People are overconfident. Psychologists have determinedthat overconfidence causes people to overestimate their knowledge, underestimate risks, and exaggerate their ability to control events. Does overconfidence occur in investment decision making? Public stock or security selection is a difficult task. It is precisely this type of task at which people exhibit the greatest overconfidence.
If you havent already, it might help to first read the background on Overconfidence in Trading.
Psychologists have found that people become overconfident when they experience early success in a new activity. Also, having more information available and a higher degree of control leads to higher overconfidence. These factors are referred to as the illusion of knowledge and the illusion of control.
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