Overconfidence Bias
The tendency to overestimate one's own knowledge, judgement or ability to predict outcomes.
How it is identified
Test: stated confidence intervals are too narrow, so outcomes fall outside them far more often than the stated confidence implies
Unit
qualitative
In depth
Overconfidence has three forms: overestimating ability, overestimating precision, and overestimating one's standing relative to others. Its most measurable consequence in markets is excessive trading — Barber and Odean's study of thousands of accounts found that the most active traders underperformed the least active by several percentage points a year, almost entirely through costs. It is stronger in men than women in that data, and stronger after a run of successes, which self-attribution bias converts into evidence of skill. The countermeasure is to state probabilities in advance and score them, which quickly reveals how wide the honest interval should be.
Worked example
Asked for a 90% confidence range for a stock's price in a year, most people give a range that contains the outcome about half the time. The interval was labelled 90% and behaved like 50%.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Overconfidence Bias” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.