Don’t Let Overconfidence Convince You That You’re a Better Investor Than You Actually Are

When resources are at stake and outcomes are unknown, investors’ biases often cloud their judgement. Filling in the knowledge gaps with assumptions is not a good way to invest, but it’s how many are hard-wired. Overconfidence bias can crown ourselves with more authority than we deserve, hindsight bias can rewrite the history we remember to make ourselves look good, attribution bias allows us to blame anyone but ourselves for our own errors, and confirmation bias has us weigh information that supports what we already believe too heavily. Make sure opposing viewpoints are considered before making a hasty decision about investing.

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It shouldn’t surprise anyone that these biases exist – to be human is to be biased. However it is important to identify and become aware of these biases in order to make more sound decisions. It’s often wise to calculate the risks of your “sure-fire” investment idea prior to moving forward with it. So when you selectively recall only the highly-profitable investments, seek investment advice from a professional and don’t forget about the investments that plummet also.

Here’s some analysis from The New York Times on the topic: