Overconfidence can lead to financial mistakes from "summary" of Your Money and Your Brain by Jason Zweig
Overconfidence can lead to financial mistakes because it causes investors to take on too much risk. When we are overconfident, we tend to believe that our abilities are better than they actually are. This can lead us to make decisions based on faulty assumptions and faulty information. For example, if we believe that we are experts at picking stocks, we may trade more frequently than is prudent, racking up transaction costs and taxes that eat away at our returns. Overconfidence can also cause us to ignore warning signs that we are taking on too much risk. When we are overconfident, we may convince ourselves that we are immune to losses, leading us to hold onto losing investments for too long. This can result in significant losses that could have been avoided if we had been more realistic about our abilities. Furthermore, overconfidence can lead us to make poor investment decisions based on flawed reasoning. For instance, we may become overconfident in our ability to predict the market, leading us to make big bets on a particular stock or asset class. If our prediction turns out to be wrong, we may suffer significant losses that could have been avoided if we had been more humble in our approach.- Overconfidence can cloud our judgment and cause us to take on more risk than is appropriate for our financial goals. By recognizing our limitations and being more humble in our approach to investing, we can avoid the pitfalls of overconfidence and make more rational financial decisions.
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