Investors Behaving Badly: Overconfidence

Overconfidence may be the most endemic of behavioural errors that we are prone to as investors

Lee Davidson 8 February, 2012 | 10:57AM

Scroll down to the end of the article for links to parts I, II, III and IV of this 'Investors Behaving Badly' series.

In 1949, Benjamin Graham famously quipped, "The investor's chief problem - and even his worst enemy - is likely to be himself." In my opinion, this statement perfectly captures the idea behind this series and the reasons for writing it. Ever since this statement was made, whether by conscious choice or random chance, academics have been gathering and analysing data that supports Graham's assertion. In particular, today's topic of "overconfidence" has been the subject of intense scrutiny by academics for years. To put it simply, overconfidence can be defined as the tendency to think you are right more than you actually are. Now, most of us are reminded of this daily (especially those of us with spouses). Most of the time, the consequences of our overconfidence are not particularly dreadful and we can skate by.

Today, however, I would like to highlight some academic research indicating that overconfidence may be the most endemic of behavioural errors that we are prone to as investors. And not only is it systematic, but it can be measured historically with astounding accuracy.

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About Author

Lee Davidson

Lee Davidson  is an ETF analyst with Morningstar Europe.

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