If yes, you will relate to this chart. If not, this is what overconfidence will do to you.
“How can I be wrong?”
It can easily be claimed that no problem in human judgement and decision-making is more prevalent and more potentially dangerous than overconfidence.
We are generally overconfident in our abilities. In addition, we tend to be overconfident in our predictions.
The worst pitfall of overconfidence is that it gives us an illusion of control. When we have no control over some event, we frequently act as if we have some sort of control. As investors, we think that we can direct the movements of the stocks we hold.
This is just because we are overconfident that we are always correct in our decision making. The result of this is mostly desperation, loss, and fear of future outcomes.
Overconfidence is possibly the most rampant emotion in the stock market.
When times are good, investors become overconfident and believe that stock prices will rise to the skies. And when the tide turns, and markets crash, these very people are overconfident about ‘death of equities’.
The above chart is an exact representation of how overconfidence drives investors to make mistakes…again and again.
How to throw out overconfidence from investing?
While it is difficult to negate your own opinions while investing in stocks (“How can I be wrong?”), it pays to be a realist instead of being overconfident.
The next time you’re about to buy a stock because you’re sure (or overconfident) it is going to be the next multi-bagger, take the time to have what I call the ‘overconfidence conversation’ with yourself.
- Ask if you are being overconfident in your assumptions to buy a stock.
- Ask what impact the decision will have if it backfires.
- Ask if you have made a similar assumption in the past that has turned out to be incorrect.
- Question yourself. Question your judgement.
- Pay attention to people who are questioning your judgement.
In short, play your own devil’s advocate.
After all, knowing the consequences of being wrong might lead you to make more careful decisions.
You will also come to appreciate the enormous potential price you might have to pay for your overconfidence.
So, have you ever been overconfident in your investing in the past? If yes, what has been your experience – good or bad?