Overconfidence bias

Overconfidence bias is the tendency to overestimate one's own knowledge, skill, or ability to predict outcomes, and in investing it typically shows up as excessive certainty in a stock pick, a market call, or one's own ability to time trades better than the average investor. Surveys consistently find that most investors rate their own skill as above average, which is mathematically impossible for the group as a whole.

Overconfidence tends to encourage riskier behavior than an investor's actual track record would justify, including concentrating too much money in a small number of high conviction positions, trading more frequently than the evidence supports, and underestimating how much a forecast could be wrong. Research on individual investor trading has repeatedly found that more frequent trading, often a symptom of overconfidence, tends to correlate with worse returns rather than better ones, since it runs up costs and often reflects chasing short-term moves rather than acting on a durable edge.

A useful defense against overconfidence is tracking actual investment decisions and their outcomes over time rather than relying on memory, which tends to recall winning calls more vividly than losing ones. Sizing positions with the possibility of being wrong built in, rather than assuming a thesis is close to certain, is another practical way to keep overconfidence from turning into outsized losses when a call does not work out.