Overconfidence bias.
In plain English
Overconfidence bias is the well-documented gap between how good people think their judgment is and how good it actually is. In investing it shows up as trading too often, concentrating in a few bets, and underrating risk. Barber and Odean studied more than 35,000 brokerage households and found that the more people traded, the lower their net returns, and that the group psychology research flags as more overconfident traded more and paid for it. The lesson is not that confidence is bad but that acting on it, by trading more, tends to cost money after fees and mistakes.
01Why it matters
Overconfidence quietly raises how much people trade and how much risk they take, and because each trade carries costs and each concentrated bet carries risk, the bias tends to lower returns rather than raise them.
02The math, step by step
In the Barber and Odean data, the households that traded the most earned meaningfully lower net returns than those that traded least, even though they were buying and selling the same kinds of stocks. The extra activity, driven by confidence in their picks, is what ate the difference.
03What this is NOT
It is not the same as competence. Overconfidence is specifically the gap between believed and actual skill. A person can be skilled and still overrate that skill, and it is the overrating, acted on through more trading, that does the damage.
04Receipts
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