Overconfidence & Frame Dependence
The most common behavioral traits that affect investment decisions adversely include:
Overconfidence Individuals tend to assign overly narrow “confidence intervals” (estimated ranges of values) to financial measures such as stock indices. In one recent survey, when individuals reported confidence intervals of 98% (a high indicator of certainty) they were right only 60% of the time.
In another survey, over 90% of people judged their interpersonal skills, driving skills and sense of humour to be above average. People are also poor at estimating probabilities: research shows that events they consider certain occur only 80% of the time.
Frame dependence Several experiments have shown that certain people find it tremendously difficult to move out of their existing frame of thought.
“Hedging your bets to protect against risk” by Didier Cossin and Dinos Constantinou