If you are, you're prone to being overconfident.
We all know that overconfidence is a problem among investors, and particularly among stock-pickers. The phenomenon has been discussed many times on Motley Fool, not least by Tudor Davies in his series on 'Mind Games'.
But who is most prone to this cognitive bias? According to a study by Bhandari and Deaves at McMaster University in Canada, the people most at risk from overconfidence are:
- men;
- the well educated; and,
- those closer to retirement.
A first look at the data shows that 76% of men were overconfident, compared to 68% of women; 74% of those with third-level education, compared to 69% of those without; and 81% of those on high salaries, compared to 68% of those earning lower salaries.
Obviously, there is a lot of overlap between these categories -- university-educated men tend to be high earners, for example -- but a more detailed regression analysis, which takes account of this overlap, still found that older, educated men were most likely to be overconfident.
Men
According to the research, "women do not differ in terms of knowledge, but, since they have much less certainty, they are less overconfident". Professor Karen Pine, of the University of Hertfordshire, and author of Sheconomics, discusses issues of gender and investment with David Kuo in this week's MoneyTalk podcast.
Education
Even when education has little relevance to investing, those with higher levels of formal education still think that they know more about the subject, or to put it another way, they are more overconfident.
This refers to formal education in general; self-taught investors tend to be more certain, but also tend to know more, are therefore do not show the same degree of overconfidence.
Retirement
The research doesn't offer an explanation as to why those approaching retirement tend to be more overconfident, but if true, it's very unfortunate as this is a time in life when important financial decisions are often made.
So if you find yourself in one or more of these categories, it might be a good idea to re-examine frame of mind as objectively as you can, and maybe read some books that you don't really think you need.
But the problem of overconfidence is very common, and the differences between the groups are not very large, so even if you're not in a 'high risk' group, overconfidence is still something to be aware of.
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