Overconfidence blinds investors to the dangers of speculative manias from "summary" of A Short History of Financial Euphoria by John Kenneth Galbraith
The belief in one's own exceptional insight is a common feature of speculative manias. Investors become convinced that they possess a special understanding of the market that sets them apart from the average participant. This overconfidence leads them to ignore warning signs and dismiss the concerns of more cautious observers. As the mania gains momentum, the sense of invincibility grows stronger, and investors become increasingly detached from reality. In the midst of a speculative frenzy, investors are often blind to the dangers that lurk beneath the surface. They convince themselves that the rules of investing no longer apply, and that the usual risks can be safely ignored. This mindset allows the mania to take hold and reach unsustainable heights before eventually collapsing in a spectacular fashion. The overconfident investor is left shocked and bewildered, unable to comprehend how their brilliant strategy could have gone so wrong. The allure of easy money is a powerful force that can cloud judgment and lead to irrational decision-making. Investors in the grip of a speculative mania are motivated by the prospect of quick riches, and this desire blinds them to the inherent risks of their actions. They believe that they are immune to the laws of economics and that they can defy gravity indefinitely. This hubris ultimately proves to be their downfall, as the market corrects itself and reality comes crashing down. It is only in retrospect that the folly of the overconfident investor becomes apparent. The euphoria of the moment gives way to despair as losses mount and fortunes are wiped out. The lessons of history are forgotten, and the cycle of boom and bust repeats itself with alarming regularity. The overconfidence that blinds investors to the dangers of speculative manias is a timeless phenomenon that continues to wreak havoc on financial markets.
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