Overconfidence bias
Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT
Meaning
Overconfidence bias is the tendency to overrate one's own knowledge, skill or ability to forecast. People believe their predictions are more accurate than they really are. In finance, this leads to too much trading, too much risk-taking and too little diversification, which means spreading money across many investments.
Example
Many retail traders in India trade derivatives (futures and options), believing they can predict short-term price moves better than the market. Their trading is often loss-making.
Don't confuse with
- Confirmation bias: seeking and reading evidence to fit an existing belief. Overconfidence is about overrating one's own ability or accuracy.
Related concepts
- Behavioural economics
- Bounded rationality
- Satisficing
- Heuristics
- Anchoring
- Availability heuristic
- Confirmation bias
- Prospect theory
- Loss aversion
- Endowment effect