Atlas of Cognitive Biases #11 · Overconfidence. You know less than you feel you do
What it looks like in trading
overtrading
too much risk relative to the uncertainty
“I know where the market is going”
An example from a session
The daily plan assumes a single scenario with “95%” certainty. When the market goes the other way, the trader has no plan B and acts on emotion. The solution: conditional scenarios, as in the daily plan in the 🔴 Live Room.
What the research says
Brad Barber and Terrance Odean (2000) analysed the accounts of 66,000 households: the 20% who traded most earned 11.4% a year net, against 17.9% for the market. Calibration studies (Lichtenstein, Fischhoff and Phillips, 1982) show that ranges people are 98% sure of are wrong many times more often than 2% of the time.
Overestimating the accuracy of your own judgements. It usually shows up as forecast ranges that are too narrow: we're more certain than our knowledge justifies.
How does overconfidence show up in trading?
Typical signs: overtrading; too much risk relative to the uncertainty; “I know where the market is going”.
Educational content, not psychological advice or an investment recommendation.