The Best Ever

Why people think they’re better investors than they are


Every circle of friends has that one person who thinks they know it all. Something wrong with your car? That friend knows exactly how to fix it. Want to lose some weight? That friend has the best workout/meal plan. And when it comes to investing, that friend is an expert. Thanks to plenty of research, at least we know why that friend considers themselves a stock market genius. Below are some of the factors.

Overconfidence

Studies have shown that we are all naturally overconfident in our skills, no matter what they are. Even when people claim to be novices about a specific subject, they still overestimate their knowledge when put to a test. As humans, we’re simply hardwired to consider our investments to be better than they actually are.

Optimism Bias

Just as we’re programmed to be too confident, we’re also programmed to see the silver lining among the darkest of clouds. This is what scientists refer to as optimism bias: The natural tendency to believe that things will ultimately work out in your favor.

Hindsight Bias

What keeps us going, despite being overconfident and much too optimistic? Hindsight bias. This is the way we tend to rewrite our own history to make our decisions look better than they are. The New York Times reports that in one study by a Harvard team of researchers, participants were asked to predict things pertaining to real-life events (like the World Series winner). Next, after the events happened, the participants were asked to remember the events and their corresponding predictions. Almost every participant misremembered their predictions in ways that made them look smarter.

Chris O'Shea

Powered by: SavvyMoney