The world is currently focused on South Africa as they host 2010 World Cup. Speaking about World Cup, most of us football fans should remember the day Ahn Jung Hwan destroyed Italian's dream in 2002 World Cup final-phase. That is one of many surprises that happened during the competition. The moral of the story is, shit happens. Overconfident could cause unhealthy effect when things went wrong.
Psychologist said that overconfidence could make someone give exaggerate value of their limited knowledge and ability, underestimating all risk, and believe that they could control any event that may occur. In investment, overconfidence is often discussed, especially on beginner. To make thing easy, take a look at this example. You are a beginner in investment and does not really understand about your ability and knowledge, but suddenly you gain a load of profit. The event make you think that the success is a manifestation of your expertise in investment. So any decision you've done later is made out of your unproven confidence. This is an overconfidence in investment.
Psychologist also said that most people become overconfident if they have an early success in any activities of their choice. Then, when those people have more information about their activity, they will get way over their own head. In psychology, this mental state is called Illusion of Knowledge. Too many information does not always mean that your decision will get better. The trick is how to pick only the right and essential information to support your decision in investment. Here is the example, when playing with dice, each of the number of the dice have the same 1/6 chance. However after the fifth throw the number that comes out is always 4. If you have this information, What number will you choose next? Illusion of Knowledge will make people choose 4 as they have came out fifth time before. What you should understand here is, no matter what, the numbers of the dice have the same change of 1/6, so it does not matter if you choose any other numbers.
As an investor, you have access on many information, including historical data (prices, yields, and transaction volume) and real time data utilizing technology like internet. For expert investor, this data is very helping. In contrast, beginner often do not know very much about interpretation about these information and most of the times, as they have access of these information, they feel so secured about their decision the same way as the dice example above.
Lesson that we all should take from the illustration above is investment is not as easy as flipping your hand. Gaining information is not sufficient as we have to extract the right analysis from the information to support our decision. Overconfidence could make us ignore the accurateness of the information and overestimating our ability in analyze it. This will lead to the wrong decision and wrong decision means loss in investment.
No comments:
Post a Comment