So many financial behavioral biases, so little time! We resume our series with our final batch of biases: overconfidence, pattern recognition, recency, sunk cost fallacy and tracking error regret.
When we are pursuing a goal – whether it's fame or fortune, or just getting through our daily lives – we all have a very human tendency to overestimate our odds of success.
Overconfidence is generally beneficial, because it's what gives people the nerve to do hard things—such as asking for a raise or running a marathon. But it can be dangerous for investors. Combined with a host of other biases (such as greed, confirmation bias and familiarity bias), overconfidence fools us into thinking we can consistently beat the market by being smarter or luckier than average. In reality, it's best to be brutally realistic about how to patiently participate in the market's expected returns.