Chris Lau - Seeking Alpha

Wednesday, July 29, 2009

Overconfidence

Malcolm Gladwell wrote an excellent piece about overconfidence in The New Yorker. I bring this to my own attention as well as yours for a number of reasons. It was my experience that one of the ways to produce good research, after obtaining the facts that matter, is thinking objectively.

Separating one's own emotion in analyzing a stock is a requirement. In trading, this same lack of emotion is required. At some point in time, you make consistently profitable trades. Confidence sets in. Overconfidence might set in too. Gladwell's article puts overconfidence into perspective:
Most people are inclined to use moral terms to describe overconfidence—terms like “arrogance” or “hubris.” But psychologists tend to regard overconfidence as a state as much as a trait. The British at Gallipoli were victims of a situation that promoted overconfidence. Langer didn’t say that it was only arrogant gamblers who upped their bets in the presence of the schnook. She argues that this is what competition does to all of us; because ability makes a difference in competitions of skill, we make the mistake of thinking that it must also make a difference in competitions of pure chance. Other studies have reached similar conclusions. As novices, we don’t trust our judgment. Then we have some success, and begin to feel a little surer of ourselves. Finally, we get to the top of our game and succumb to the trap of thinking that there’s nothing we can’t master. As we get older and more experienced, we overestimate the accuracy of our judgments, especially when the task before us is difficult and when we’re involved with something of great personal importance.
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