The word overconfidence refers to the tendency to beoverconfident in one’s abilities and skills.
Studies have found that this tendency is especially prevalent among men, who are generally found to be much more“overconfident” than women.
There are two main types of overconfidence :
The first is called “ above-average effect ” , that is, when one considers oneself to be a little better than the average of others, a little better at driving a car, a little better at cooking, better investors than the average investor in the market.
In a U.S. study, it was noted that by posing a questionnaire on car driving skills to two different groups of people, in both cases it was found that more than 80 percent considered themselves better than the average American at driving a car. Which mathematically could not exist unless in the random choice you stumbled upon a class of pilots.
This tells us thatoverconfidence is quite widespread.
The second type of overconfidence is based on two different aspects of illusion.
The llusion of control and the illusion of knowledge.
Theillusion of control refers to theillusion we have that we can control unpredictable phenomena such as the performance of financial markets. The second illusion, on the other hand, is the illusion of knowledge that makes us think we have enough information to make the best decisions and that often leads us to encounter risky or unpredictable dynamics.
Having confidence in ourselves is an extremely important and positive thing because it guides us and keeps us moving forward to best achieve our goals. Overconfidence, however, becomes a problem when it causes us to underestimate some important risks we may be facing. This is also the case in financial investment and online trading. Indeed, we may believe that we have become experts in finance and trading just because some investments or trades went well.
Sometimes it happens that you make a very good trade and you think that therefore it is the right day, that you have been kissed by luck, and so you re-enter the market but without the right concentration anymore, with overconfidence and the illusion that you have everything under control. This leads to leaving strategy and technique aside a bit. Most of the time the result is to lose even what you had just gained.
Particularly among those who trade online the overconfidence may be more prevalent because the online platform particularly lends itself to the 2 illusions underlying “overconfidence”: the illusion of control and the illusion of knowledge. In fact, on the online platform, we directly place the orders, and this feeds our illusion of control because it makes us feel more responsible for the fact that an investment that we ourselves have placed can have a positive return without anyone’s help.
The illusion of control and the illusion of knowledge are found equally in the inexperienced person as in the professional. Among professionals it is very common especially when making big money.
To mitigate overconfidence, we need to remember three basic things:
The first is that “small” traders or investors certainly do not move the market, nor do they rule it.
The second is that when you interact in the financial markets you can never know exactly who you are interacting with. There are significantly more powerful and valuable professionals, machinations, and outside agents than we are with more information and more expertise!
The third is that one should always keep an eye on the risks one takes. Last but not least: in life as in investment, remaining “humble” is a virtue that pays off in the long run.