Overconfidence

Trader's Glossary · Psychology

Definition. The tendency to overestimate your own knowledge, skill and forecasting accuracy. One of the best-documented cognitive biases among investors.

How it works

After a series of successes, the sense of control and the appetite for risk grow. Research by Barber and Odean showed that the most active individual investors performed clearly worse than the market.

Example

After a few good days a trader skips the checklist and makes more trades than usual, because “everything's working today”.

What to watch out for

What helps is calibration: recording your confidence level with each decision and comparing it with the actual results.

See also

Overtrading, Loss aversion, Tilt.

More in Hetman Capital Club

You'll find the full explanation with graphics, examples and exercises in the 🧘 Trader's body and mind space, and its use in the live market in the 🔴 Live Room. Both are available to Club members (in Polish).

Educational content, not investment advice.

Full article in the Atlas of biases: what this bias looks like in trading, an example and the research.