Overconfidence and Hubris: Too Much of a Good Thing

This chapter analyzes the effects of overconfidence and hubris on investor decision quality. The first stage of hubris is to have a series of gains or acclaim. If those gains are attributed to one's unique talents, skills, or intelligence, then they can contribute to a persistent pattern of overconfidence. Overall, overconfidence leads to a number of mistakes in decision making. The overconfident attribute bad outcomes to uncontrollable circumstances and good outcomes to their own excellence. For overconfident investors, risks are ignored and their belief in themselves is hypertrophied. In one study, educational seminars reduce the effects of one behavioral effect of overconfidence. Education may attenuate overconfidence in other arenas as well. A technique for minimizing overconfidence among individual investors involves alerting people to the nature and negative consequences of overconfidence.