Wealthy-easily's psychology of investing series - The superiority bias

in psychology •  8 months ago

When asked, 80% of students see their chances of being within the 50% most successful people in their field more

than likely. Now that simply can't be true, however, we tend to see that being within the 50% best is the minimum we will achieve. This effect which can also be called the above-average-effect or illusory superiority, is also existent in investing.

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Everyone can't be average or above average

Now everyone wants to be better than average and most see their chances as quite high. If they try to think realistically, force themselves to push their dreams away, they still place themselves around the average, say 50% best in what they are focusing in, be it education, work, or investing. When everyone else also believes this, the outcome is that the large majority, possibly even more than 80%, see their chances of being average as more than probable. This is of course a mathematical impossibility.

When investing, it can be dangerous to blindly trust you know better than others

Especially when it comes to cryptocurrencies, the average person that invests in them believes he or she knows better than the average investor. They believe that their judgment of cryptocurrencies is better than that of the other person who invests in weird coins. The reality is that probably they also have no actual clue as to what cryptocurrencies will do well.

I want to believe there are ways to know, which cryptocurrencies have better chances of survival, but I don't think anyway can know which currency will be the next one to go up in value. The chances are that you as well believe that you are better at investing in crypto than the average investor. Of course, currently you should assign yourself in experienced of new to cryptocurrency to accurately judge if you are better than average.There, you see what I just did, I assumed that the experienced cryptocurrency investor is above average at investing in cryptocurrencies and I ofcourse assign myself in the experienced section. Even I am not immune to the bias despite writing about it, however, I spotted it this time. It is hard to say if experienced cryptocurrency investors are any better than those totally new. You might want to say it is obvious and that you are sure you are better than the average new person, but are you sure?

Biases are hard to spot

The thing about biases is that it is hard to actually tell when they affect. Most of the time even actively thinking about biases won't help. You will still fall pray to them, but it usually helps to some extend to be aware of them. I will admit that I fall pray to biases very often despite knowing about many of them. I will also admit that I tend to think that I'm better than average in many things, but if I start to think about it critically, am I actually? The best thing you can do is take nothing for granted.

Most day traders think they know better than the average person how the market acts

Day traders are usually completely unaware of all the biases affecting investing. If they knew, they wouldn't trust their own judgment. If they are successful, they are most likely lucky that their pattern works. Day trading with a random pattern can also work, no one really knows what actually works, if they did, they would be rich in no time. If you could make a trade of 1% at about 70 times, you would double your money, if you continue and do it 140 times, you would have 4 times as much and so on. So if day traders knew better than the average, they would just keep on making money and would eventually be the richest people on earth.

Well, everyone can judge by themselves if they are better than average, but I hope you now understand the problem with that.

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Great post. I also find myself falling for biases much of the time as well. It is really hard to avoid them!

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Thanks! Luckily you're not alone, to err is human. :)