This week is devoted to better-equipping you to make careful, self-controlled, unemotional decisions as often as possible, through better understanding the behavioral finance concepts that influence your decisions. 

Today, I’m talking about overconfidence bias. Overconfidence bias is when people’s subjective confidence in their own ability is greater than their actual performance. 

If you think you’re a good driver, you’re probably just falling victim to overconfidence bias. More than ¾ of Americans say they are above average drivers, but if you think about it, that’s statistically impossible, since ¾ of drivers can’t be above average. Clearly overconfidence bias is at work here. In fact, this statistic probably seems laughable to you, considering that most of us witness poor driving on a daily basis, and 93% of drivers admitting to unsafe behavior behind the wheel. But that’s other people right? Not you or me? I’m a good driver. 

Overconfidence bias can not only be a big problem for bad drivers who don’t think they need to improve their behavior. It can also be a big problem for your investment portfolio. 

I’ve been in conversations with people before who clearly have selective memory. They tell you that they’ve made 16% per year going back to 1984, or that their real estate holdings have never lost value. They may actually believe that this is the case, but they’ve just put their mistakes and blunders out of their mind. 

Overconfidence can also be a big problem for professional investors, portfolio managers, and your financial advisor, so be careful about working with anyone with a big ego, who can’t or won’t admit that they’ve made some mistakes over the years. Even the most talented investors in the world like Warren Buffett have made some big mistakes. Part of why he and others like him are so successful is because they have the humility to see that they were wrong and they learn from their mistakes. 

Overconfidence bias can lead to excessive risk-taking with your retirement portfolio, lead to concentrated positions where one industry or one company makes up a bloated portion of your portfolio, and too much trading - all of which can lead to some big blow ups that derail your retirement. 

So be on guard for overconfidence bias both with yourself and the professional advisors you work with.

That’s it for today. Thanks for listening. Tomorrow, we’re going to recap the week and I’m going to give you a little preview of next week’s theme. 

My name is Ashley Micciche and this is the One Minute Retirement Tip.

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