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In his book, ‘The Behavior Gap,’ financial planner and blogger Carl Richards makes no bones about the damages overconfidence can cause even the most experienced investors.
‘It’d be good if just Nobel Reward winners and Federal Reserve Board chairmen were susceptible to overconfidence– but reams of research program that the rest of us have a comparable trouble,’ he writes.
A team of Goethe College Frankfurt analysts recently put overconfidence to the examination in their report, ‘Do Person Investors Learn From Their Mistakes?’.
They discovered that investors do make better choices with experience, but only on one condition: If they’ve learned from blunders caused by overconfidence in the past.
Richards makes a similar point: ‘We could acknowledge that we are not as practical as we think we are. In fact, the smartest investors are the ones who acknowledge that they are not smart enough to anticipate occasions or select the best stock or prevent every fraud.’
Here’s the three-prong conversation Richards makes all of his customers have prior to making a big financial investment decision:
- If I make this change and I’m right, what effect will it have on my life?
- What impact will it have if I am wrong?
- Have I been wrong before?
Chances are you’ll have a more clear view of your course once you have answered these truthfully.