Are you as good at investing as you think?
- Robin Powell
- Feb 24
- 4 min read
Overconfidence is one of the most common behavioural traps in investing. Just as most people think they’re better-than-average drivers, many assume they’re skilled investors but the numbers suggest otherwise.
CONSTANTINOS ANTONIOU from Warwick Business School says this kind of overconfidence leads to poor decision-making, particularly in investing, where people tend to overreact to news or act on unreliable signals.
Trading on rumour, reacting too quickly, or thinking you can consistently beat the market these are signs of misplaced belief in your abilities and can seriously undermine your investment results.
KEY TAKEAWAYS
1. Overconfidence leads to excessive trading
Investors often mistake noise for useful information, resulting in overtrading which typically reduces long-term returns rather than enhancing them.
2. Optimism can undermine your investment results
While confidence may help in life, in finance it can cause you to overlook risk and make decisions without enough scepticism or analysis.
3. A simple strategy is often best
Acknowledging overconfidence and sticking with a low-cost, diversified approach like global index funds is usually more effective than trying to outsmart the market.
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TRANSCRIPT
Robin Powell: Have you ever wondered how good you are at driving?
Most people consider themselves better-than-average drivers. But, statistically, half of us HAVE to be below average.
That’s a classic example of what behavioural scientists call overconfidence bias.
Constantinos Antoniou: That way manifests itself in decision making overall, is that people tend to think that they are better at doing a task than what they really are.
So this could be, you know, your sense of humour, your driving ambiguity, and also has a big impact on investment decisions. Now, how can influence the decisions? It could be the case that you over and or you over rely on information that is not really information.
So you trade too much on the back of news or rumours that you analyse and think that there is some value, there is some signal there that could help you actually, make money, but in fact there is nothing there. It's just noise.
So overconfidence will make you think that there is something of value there, but in fact, there is nothing.
So what ends up happening is that you trade more than what you should trade.
RP: Though there’s some disagreement as to why human beings are so prone to overconfidence, it’s commonly believed to be a trait our early ancestors developed.
But characteristics that were helpful tens of thousands of years ago don’t always serve us well today.
CA: As far as survival goes, perhaps overconfidence is a good thing. But in the domain of investments, it is not a good thing. So, why people are overconfident is because, you know, we tend to like to have an optimistic view of ourselves.
And that is a good trait to have in general, you know, so you just, you know, go through your life thinking that you are not good enough and being, you know, just pessimistic about your own ability.
And, it is not going to, to lead to good outcomes in general. So overconfidence is a good trait. I think, for people, to have. But in financial decision making perhaps it is not so helpful.
RP: So, is there anything investors can do about overconfidence? Thankfully there is.
CA: The most important thing is to acknowledge that we tend to be overconfident. So to be sceptical, the decisions that we take.
So I would suggest, you know, so you make some decision okay I'm going to buy this particular asset. Play devil's advocate on your own decision and try to look for information that would go against this decision that you took.
Can you find this information? If you can't find it, then think about it.
You know, is this something that I should have considered and I did not consider or, you know, and if you don't find any information, then, you know, it gives you confidence that it was perhaps a, you know, a good, sensible decision.
RP: If you suspect you’re being overconfident, the best advice is to err on the side of caution.
By simply staying invested in low-cost index funds, you can expect better-than-average returns after costs in the long term.
