By: Punam Sharma
The Odds are in my favour !!!
I’m on holiday in Goa and what’s life without a little thrill. I’ve set aside a few thousands to gamble over the weekend at the casino. I’m hoping to get lucky and have some fun. A few hours and halfway into my weekend, I find myself at the roulette table. I’m feeling good, sure that I’ve finally cracked the system got around the numbers and I’m ready to turn my recent down streak into big bucks. A final deep breath and I place my bets…
I’m right where the casino wants me… Confident and sure that I can win.
All casino games are rigged. Everyone loses money eventually if not immediately. The odds are against the gamblers. Gambling gets people for what their worth: emotionally, mentally and financially. But it can’t happen without our active support, and most of it is self inflicted.
We can lose a few thousands at the casino but the effects of overconfidence can be devastating while investing. It’s not hard for some of us to believe that we can beat the market. To other it may appear as being self-centered and arrogant but then we have a system and we are confident that it works.
Humans are hard-wired to see themselves in the most favourable terms. We are confident about our ability to foresee the future and are optimistic about our forecasts.
This overconfidence gives us the sense that we are above average drivers, endowed with above average beauty and blessed with above average intelligence. When things however do not go as per our forecast we often blame the environment but seldom ourselves.
Overconfidence and over-optimism are particularly prevalent when decisions must be made in conditions of uncertainty. In these situations we tend to miscalculate the risk of events and only perceive outcomes that will have be favorable to us . We thus do not take appropriate precautions.
Investors who lose money more often (and in greater amounts) than they should, often do so because of overconfidence. Overconfidence can lead to the conviction that one is only buying investments that will be highly profitable and one is only selling investments that no longer have significant upside potential. We tend to;
• Taking more risk than we have the ability, willingness or need to take
• Failing to diversify the risks we do take
• Investing disproportionately in a particular stock/ Asset class or security
• Trading too often
Of course, if overconfidence and over optimism were the only behavioral biases we needed to worry about then we might, just be able to overcome these on the way to becoming better investors. But they are a starting point.
My tryst with overconfidence has taught me ..
“Before you attempt to beat the odds, be sure you could survive the odds beating you.”
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