Personal Finance Essentials
Optimism Bias
The Psychology of Investing > Optimism Bias
While greed refers to overconfidence in the markets, optimism refers to overconfidence in yourself.
In studies, everyone says they are an above-average driver. Obviously, they can’t all be correct. If your willingness to buy an investment is based on your predictions, your confidence is actually overconfidence – and that means you’re suffering from optimism bias.
Optimists tend to:
exaggerate their talents
think they’re better at investing than they really are
overestimate their knowledge
exaggerate their ability to control events
underestimate the risks they are taking
The antidote to optimism bias is not pessimism – it’s realism. Making investment decisions based on the historical record, a well-diversified portfolio and a disciplined long-term strategy is far more reliable than making them based on personal forecasts.