Are There Disadvantages to Being a Confident Investor?

Are There Disadvantages to Being a Confident Investor?

Who is usually a more confident investor – a man or a woman?

When Professors Terrance Odean and Brad Barber conducted a study of 60,000 individual investors, they found that the male investors were far more confident in their investing decisions than their female counterparts.

But is an abundance of confidence always a good thing?

Overconfidence on the chessboard

When chess players are too confident, they overestimate their ability, sometimes to the extent that they refuse to believe their opponents could win. In many cases, this overconfidence leads to failure.

Even though overconfidence may lead to failure, many chess players are overconfident in their outlook.

Why?

In the book The Invisible Gorilla, Christopher Chabris and Daniel Simons describe a study where they asked tournament-level chess players two questions:

  • What is your most recent official chess rating?
  • What do you think your rating should be to reflect your true current strength?

Given the rigorous methodology used to calculate chess ratings, the two answers should have been the same, or at least very similar. However, 75% of the respondents claimed that their actual score underrated their true ability by about 100 points.

Even if statistics told them the opposite of what they believe, they were overconfident in their self-analysis.

What is an overconfident investor?

Overconfident investors tend to trade more actively than others. After all, they feel they have a solid grasp of how the market works, and good picks for winning investments.

In the study of individual investors conducted by Professors Odean and Barber (mentioned above), single men traded 67% more actively than single women, but the men underperformed the women by 1.4% per year.

Many of these men have the “illusion of knowledge,” caused by the wealth of investment information available to them on the web. This boosts their confidence in their abilities that they think they can forecast the market. Unfortunately for them, the market does not always fall into place with their predictions.

Why the gender difference?

Although attitudes towards women have greatly changed since the feminist revolution, many women still lack confidence in dealing with their financial affairs. This may be due to growing up in a home where the father was always in charge of the money, so they still perceive handling the finances as a male role. Another reason for lower confidence may be that women tend to receive lower wages than men and therefore cannot risk as much on their investments. Yet, just as being overcautious can hold you back from developing your investment potential, being too confident can also cause you to lose.

Which kind of investor are you?

Do you think you may be overconfident? To find out, take our fun overconfidence quiz here.

 

Douglas Goldstein, co-author of Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing, is an avid chess fan, international investment advisor and Certified Financial PlannerTM.

 

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