Investors might be their own worst enemies by being overconfident, posits an article in Morningstar. A 2006 study by James Montier found that out of 300 money managers, 74% considered themselves to be above average in their jobs, and the other 26% considered themselves average. Given the unlikelihood that all of those 300 managers actually were average or above, there’s a good chance that overconfidence was abundant among those surveyed.
Symptoms of overconfidence include adhering to information that supports our beliefs and eschewing any that doesn’t (“confirmation bias”), displaying more confidence about things you’re unsure about, and believing that someone who has had success in the past is more likely to have continued success than someone who hasn’t (“hot hand fallacy”). That last symptom was famously portrayed in the film “The Big Short,” where so many investors during the 2008 financial crisis believed that whatever the present situation was would continue in perpetuity. And studies have found that confidence doesn’t correspond to age, gender or IQ levels, the article maintains.
Academic research strongly indicates that investors who are overconfident and trade more frequently actually damage their gross and net performances. The ability to select winning stocks and time the sale and purchase of them just right is a rare one, but it’s one that many investors are overconfident that they possess. In contrast, the more simplistic “buy and hold strategy” may not be as flashy, but will likely serve investors better through both bull and bear markets, no matter how big their portfolio is. While it may not be easy to admit past mistakes, looking back over your trading records to identify patterns—for good and for bad—could give you the tools you need to correct those mistakes for the future, the article concludes.