You may recall that a while back we looked at ten of the most common behavioral biases that affects investors. I’ll add one more to the list: overconfidence. Here’s how Stephen Hawking once put it:
“The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.”
When it comes to investments, there’s a delicate balance. On the one hand, you do want to be informed. But on the other, it’s important to recognize that the future will always look at least a little different from the past. So investors can never be too confident in their opinions. This can be a challenge—and there’s no magic bullet. The most important thing, though, as with all biases, is simply to be aware that the pitfall exists. And that’s often the best way to avoid it.
