Investors’ Overconfidence
Overconfidence can become the norm in investment bubbles. Investment experts and the financial press were overconfident in stocks by the end of the 1990s bull market.
Your overconfidence is used against you to sell investment products. If you are a highly competent professional, your ego is likely to convince itself that it is also going to be a highly competent investor. The combination of a Realtor’s pitch and a professional’s ego has closed many strip shopping center deals.
Any investment can trigger overconfidence if properly presented to the client. Security and Exchange Commission (SEC) rules that only allow certain investments to be sold to investors with large assets or large incomes promote wealthy investors’ overconfidence in their ability to invest. Limited partnerships are a typical trigger to overconfidence. High minimum investment amounts and a limited number of shares available only to qualified investors causes many deals to be sold without proper scrutiny.
The press can also lead the masses into overconfidence. Irrational Exuberance by Robert Shiller explains in detail how the press, word of mouth, and many other factors created the stock bubble of the late 1990s. Many academic studies have demonstrated the effects of overconfidence on investors. Despite studying overconfidence, some finance professors never overcome it themselves.