Overconfidence
Rating one's own knowledge, judgement or virtue higher than the evidence supports. It narrows forecast ranges, encourages over-trading and, in ethics, makes people think themselves more principled than their peers.
Where you will meet it
Overconfidence appears in 8 learning outcomes on the CFA syllabus. A few of them:
- Tell apart what the law requires and what ethics demands, and recognise what makes ethical conduct hard
“Challenges to ethical behaviour include overconfidence, the widespread belief that one is more ethical than one's peers, and situational influences, such as money, prestige, loyalty to colleagues or pressure to meet targets, whose effect people routinely underestimate.”
- Explain how behavioural biases distort analysts' forecasts and ways to offset them
“Overconfidence produces ranges that are too narrow; the remedy is to keep a record of past forecasts against outcomes and to use scenario analysis.”
- Set out the behavioural biases that investors commonly show
“Overconfidence produces too much trading and too little diversification.”
- Set out the steps by which a fundamental active equity strategy is built
“The common pitfalls are behavioural: confirmation bias, illusion of control, availability bias, overconfidence and becoming attached to holdings.”
Practise it
Practise overconfidence until it is automatic: questions that explain every wrong option.
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