Progress Daily

Social scientists have confirmed time and again that people generally overestimate their abilities and knowledge. More than 80% of drivers think they’re among the safest 30% of those driving. When asked at conferences to write down how much money they will have at retirement versus the amount the average person in the room will have, money managers and business executives consistently judge that they’ll end up with about twice the average.

Brad Barber and Terrance Odean have found that investors generally overestimate the precision of their knowledge about a security’s value, and the probability that their assessment is more accurate than that of others. The result is more active trading but not better performance: “those who trade the most realise by far the worst performance.”

Lin Peng and Wei Xiong have found that overconfident, time-pressed investors put too much weight on market- or sector-level information and not enough on company-specific data. The authors argue that this sloppiness was a key contributor to the internet stock bubble.

“The undermining effects of overconfidence” by Whitney Tilson

This entry was posted on Tuesday, August 29th, 2006 at 2:14 pm and is filed under Economics, Cognition, Trade. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.