Over confidence Bias
In the series of 21 behavioural biases we will discuss the 3rd
bias “Over confidence Bias”
Over confidence is common word and needs no explanation.
Lets take an example – If I ask you to confirm if you are
good a speaker or a cook? Most of you will say “YES”
Saying yes is still not wrong answer!! You could be good at
it, but that’s thru your own judgement or social proof. Most often than not its
your “own judgement.” Human being usually over estimates own skills and
judgement. Research reveal that over confidence bias is not only present in
optimistic people but in pessimistic people also. Men are more victim of over
confidence bias than women (consult your wife while you decide on important
matters. Ha ha ha).
You feel that because your mind is positive and optimistic.
What is missing here is realistic
approach.
Over confidence kills the student in you and also kills your
growth prospects as you are unwilling to learn and develop.
In investing also a similar error is made! You decide on an
Investment opportunity and many times, the over confidence bias plays bigger
role. There could also be social proof that triggers your over confidence bias.
An over confident person tends to take bigger bets. Let’s
examine – You figured out that a particular stock or MF scheme is likely to do
well. You will tend to invest more money because you are confident about the
outlook of returns. Whether it was confidence or over confidence – time only
will tell.
In 2017 and 2018 when the markets were doing great and all past
returns were attractive, I got more money from Investors. I had tough time
convincing them to adopt the conservative path of Investing. I said it’s time
to walk and conserve energy (conserve capital) rather than running (chasing
returns). My strategy paid off. More and more people were wanting to Invest in Small and Midcap funds.
Investors got over confident as TV, Print and everyone
(including Banks, large distribution houses, brokerage firms and Individuals
like me) were painting great outlook for the market. The evidence is that Mutual Funds received very high inflows during last 2 yrs. What happened in last 2 yrs is
for all of us to see. People have hardly made any returns since 2 yrs.
Now the same investor is over confident that there is no money to
be made in future also.
I don’t agree even now. I feel if you invest wisely, there is high
probability to make money hereon.
What should you do?
11) Under estimate your own wisdom as that leads to
learning.
22)
Ask yourself if I am really an expert on
Investing?
33)
Ask yourself if the person I am following is an
expert (friends, relatives, colleagues)
44)
Are my objectives aligned with who am I
investing thru? My advisor.
55)
Avoid Do It Yourself. It can be really bad in
Investing.
66)
Keep margin of safety and also pay attention to
risks associated to that Investment.
77)
Look for trend from long history, data and
situations before you decide to Invest.
MF Trivia: In India, your investments in Mutual funds are
held under trust which has no business activities. Mutual funds can't leverage also. Therefore
it’s safe and can’t go bankrupt like many companies.
This article
is written by Bhavesh D Damania founder of Wealthcare Investments.
You can reach
him at 9833778887 and wealthcarein@gmail.com
"Risk comes until you know what, where and why you are
Investing"
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