Over the years, the many people I’ve worked with have had both good and bad traits. No doubt they’d think similar things about me. The one trait that I find most tiring is a high overconfidence gap, which I define as the difference between how good you think you are and your actual abilities. Confidence is a useful thing in many contexts, but it can be deadly for your finances.
As a baseball coach, I routinely talk up players’ confidence before sending them to bat. Believing you can hit the ball improves how hard you try and leads to better outcomes. Confidence also leads to more improvement over time. Too much confidence can cause problems, but for the most part confidence is useful in baseball.
I’ve watched the cycle many times. A batter goes to the plate with confidence and either gets a hit or doesn’t. Failing causes a short-term blow to the ego that fades before the next at bat. Confidence helps. Even overconfidence helps within limits.
When it comes to investing, a large overconfidence gap can be very dangerous. You need some confidence to be able to take your money out of a savings account, but too much confidence leads investors to take wild chances on their hunches. I’ve done it myself piling most of my net worth into one stock. But I don’t do this anymore.
The cycle I observe among some high-tech workers is they are very confident in their assessment of some stock. They buy, the stock tanks, and they protect their egos with some explanation of why the bad investment wasn’t their fault. Then they do the same thing over again time after time.
It can be very hard to examine a stock, form a strong opinion, and admit to yourself “it’s just a coin flip whether I’m right or wrong.” It’s staggering that we often think we can do a little work on the side and beat full-time investment professionals at their game.
Even more baffling are the stock-pickers who don’t even read company financial statements. It’s impossible to pick stocks well without examining financial statements and comparing their meaning to the stock’s current price. A quick test I have for those touting a stock is to see if they can quote any of the company’s major financial figures from memory.
Confidence is important in many areas of our lives, but overconfidence can hurt you financially. Mind the overconfidence gap.