Are you a good driver? Compared to other drivers on the road, are you:
A. Above average
B. Average
C. Below average
The way that you respond to this question may tell a lot about your approach to investing. Most investors are overconfident. Psychologists have determined that overconfidence causes investors to overestimate their knowledge, underestimate risk, and exaggerate their ability to control events.
If overconfidence were not involved, approximately one-third of those asked this question would answer above average, one-third would answer average, and one-third would answer below average. In a published study, 82% of sampled college students rated themselves above average drivers. Clearly, many of them are mistaken!
Overconfidence causes investors to believe that their stocks will perform better than stocks they do not own. Interestingly, another survey of individual investors asked what they thought the overall stock market would return over the following 12 months. The average answer was 10.3%. When asked what return they expected to earn on their portfolios, the average response was 11.7%. Typically, investors expect to earn an above average return, when in reality, their return is below average.
Overconfidence leads investors to make poor investment decisions, which often manifest themselves as excessive trading, risk taking, and ultimately portfolio losses. If this sounds like you, you need the discipline and success of the award-winning GorillaTrades system!