Investor Decision Making - A Psychological View ------ Chapter 4 ----- Overconfidence

Good afternoon everyone

As promised, I will talk about the wrong biases that investors have that hinder their decision-making within the financial market. Today, I will speak of 1 which is very important.

1- Overconfidence

This is a bias that is present mainly in men, because, culturally, man was created to take the front while the woman is in his care. Fortunately, with the passing of the years and the evolution of people, it will reach a point where men and women will walk side by side (50 to 50%) without any subjugation of the other.

Self-confidence is related to the conviction that the person has in relation to being able to perform some work. It becomes self-conscious of its ability to perform something. Being safe is very important for achieving our goals. The problem is when this self-confidence becomes excessive and can seriously damage the financial results that an investor will have in the stock market. The excess of self-confidence is present in every world population at any time of life.

Remember the 300 movie, in which King Leonidas and his soldiers never backed down, because they always imagined being superior to the opponents ?? What happened to them??? In his overconfidence, Leonidas did not think that by not letting that deformed soldier named Elphiates join the group, for he was not within the characteristics of a strong group, he would suffer his betrayal, revealing the secret for the enemy forces to advance without decimation, decimating his army quickly.

It is stated by many studies that 80% of people consider themselves to be above average with regard to the skills they possess and so are investors. Moreover, because the excess of trust is more connected with men, the capital market becomes the host of this profile, since the vast majority of people within are men.

This excess of self-confidence makes one find it easy to deal with the financial market and thinks that it will never make mistakes. This lack of psychological preparation makes her lose much of her temper.

Usually those who are in this area, especially the people who make trades (buying and selling stock on the stock exchange) have this erroneous bias. It always appears in forums that people say that action "x" will fall and others saying that action "x" will rise. Each one has too much self-confidence in their thinking about this, causing them to make several arguments that show what they are saying is correct. But in this market, there is no way to know these issues before they happen. These people lack humility to understand that they have no knowledge of all the facts, and it is impossible to conclude something that will happen with a certain action, before this thing happens. It's akin to this football fan issue always creating arguments to say that your team is better. It arrives on the day of the game and nothing of that happens and the twister goes sulking home. See the 7x1 we took in the World Cup. Who would have thought of that score before the game?

A big problem that I notice in this is when the person is a beginner and hits a trade. It puts for example 5000 reais. You strike a trade and your capital rises to 6000. Hit another trade and your capital rises to 8000. Hit another one next and your capital goes to 12000. Soon, your self-confidence in your abilities will inflate and suddenly, the person is even in debt to get money and trade on the stock exchange. However, this excessive self-confidence causes her to risk everything and in an erroneous trade, lose her capital and incur indebtedness, both to pay the brokerage firm and to repay the debt she made, imagining that she would make money from it. For those who accompany this area, there are always questions of people who have sold cars, real estate, etc. thinking that they would earn a lot of dollars with shares, but in the end, they lost the car, the property and still saw themselves indebted .....

In conclusion, never lose humility in this area. In all walks of life we ​​need to be humble and realize that we are flawed and we are always learning. In the financial area, such an error can cost someone years of work.

I hope you have enjoyed it and in the next post I will continue with biases that hinder the decision-making of the investor.

Thank you and good morning!!!