The Web is brimming with assets that proclaim, “practically every part you believed about investing is wrong.” Nevertheless, there are far fewer that intention that can assist you grow to be a greater investor by revealing that “a lot of what you suppose you recognize about your self is inaccurate.” On this collection of posts on the psychology of investing, I’ll take you thru the journey of the largest psychological flaws we undergo from that causes us to make dumb errors in investing. This collection is a part of a joint investor schooling initiative between Safal Niveshak and DSP Mutual Fund.
Not a yr passes with out the sobering information of a distant relative or acquaintance shedding their life in a highway accident. This reminder flashes earlier than me each time I begin my automotive. And so, I pause to say a silent prayer for a secure journey even for a brief journey to the neighborhood.
My spouse, nonetheless, carries a good deeper worry of highway mishaps, particularly relating to two-wheelers. A number of years in the past, after appreciable persuasion, she reluctantly “allowed” me to fulfil a long-held dream: proudly owning a Royal Enfield motorbike. That day felt like a private milestone. But, the enjoyment was short-lived. Simply three months later, she “pressured” me to promote it off after two of our neighbours have been critically injured in motorbike accidents.
I attempted to motive together with her and defined about base charges and the way a few incidents amongst hundreds of thousands of riders shouldn’t be a trigger for alarm. However her response left me speechless: “I don’t care if the chance is one in 1,000,000 as a result of, for me, you’re one in 1,000,000.” That was the tip of the controversy. Some arguments don’t want logic to be gained!
Whereas her determination stemmed from private concern, it’s unimaginable to disregard the darkish, underlying fact about India’s roads. In 2022 alone, practically 1.68 lakh lives have been misplaced to highway accidents, a statistic that retains India as the worldwide chief in site visitors fatalities. Not simply that, one other 4.4 lakh individuals have been injured throughout highway accidents, together with near 2 lakh who have been grievously injured.
As you possibly can see from the desk above, the explanations for tragedies on Indian roads go far past poor infrastructure. Reckless driving and misplaced confidence are deeply entrenched in our highway tradition. It’s a standard sight—drivers weaving dangerously by way of site visitors, overtaking on blind curves, or hurtling down potholed or poorly lit roads.
The epidemic of distraction compounds the issue. Go searching, and also you’ll see each second driver glancing at their cellphone, both texting or immersed in a Bluetooth-enabled dialog.
The mindset behind such behaviour is constant. “I’m too expert for something to go improper. Accidents occur to others, to not me.” Or, “It’s only a matter of 5 seconds. What might presumably occur if I test my cellphone whereas driving for 5 seconds?”
Right here’s some math: at a pace of 60 km/h, you cowl 83 meters in these “innocent” 5 seconds. Many drivers in India simply hit speeds of 80-100 km/h, protecting 110-140 meters in the identical time-frame. That’s greater than sufficient distance to trigger a deadly accident, endangering not simply your self however numerous others.
Why, then, accomplish that many people have interaction in such dangerous behaviour? One cultural clarification I can consider lies in India’s historical past of shortage. Rising up in a rustic lengthy outlined by restricted assets, many people have been conditioned to undertake a “me first” mindset. Whether or not it’s overtaking on the highway, reducing a queue, or cornering alternatives, we’ve been skilled to seize our share of the pie earlier than another person does. This scarcity-driven mentality usually reveals up as selfishness and rashness, not simply on the roads however in lecture rooms, workplaces, social media, and even houses.
However shortage isn’t the one issue at play. One other highly effective pressure driving this behaviour is overconfidence bias, which is right this moment’s matter on this collection on the psychology of investing.
Overconfidence Can Kill…Others, Not Me
Overconfidence is the tendency to overestimate one’s talents, data, or management over outcomes. On the roads, it convinces drivers that they’re invincible, that their abilities are unparalleled, and that accidents are issues that occur to others. It’s the identical bias that leads many to gamble recklessly within the monetary markets.
Take into account the state of the Indian inventory market right this moment. With the explosion of buying and selling apps and on-line communities, investing has more and more taken on the air of a on line casino. Tales of in a single day riches lure file numbers of retail traders into speculative buying and selling, turning the market right into a high-stakes gamble.
SEBI’s Sept. 2024 report paints a stark image: over 93% of day merchants in India lose cash, but the variety of new merchants continues to soar. Why? As a result of they consider the principles of chance don’t apply to them. They’re satisfied they’ll be a part of the fortunate minority who beats the market, even when proof overwhelmingly suggests in any other case.
That is overconfidence bias at its peak— the place one believes their instincts, data, or abilities can defy the statistical odds, regardless of proof suggesting in any other case.
Apparently, this downside isn’t uniquely Indian. Overconfidence bias is a common cognitive distortion, deeply rooted in human psychology. Research present that most individuals persistently fee themselves as “above common” in intelligence, ability, or decision-making—a statistical impossibility. For instance:
- 80% of drivers consider they’re higher than the common driver.
- 90% {of professional} cash managers suppose they outperform the common.
Such illusions of superiority prolong to investing, the place overconfidence leads individuals to overestimate their means to choose profitable shares or funds, underestimate dangers, and assume they’ve extra management over outcomes than they really do.
It’s the identical psychological error that convinces a driver to hurry on a slippery highway, believing they’re too expert to lose management.
The parallels between reckless driving and reckless investing are putting. Each contain a disregard for threat and an inflated sense of management. On the highway, this manifests as overtaking on blind spots or ignoring security protocols. Out there, it ends in speculative buying and selling, over-leveraging, and ignoring the ideas of diversification.
SEBI’s information illustrates this vividly: despite the fact that most retail merchants lose cash, the variety of individuals in by-product markets grew by eightfold in simply 5 years—from beneath half 1,000,000 in 2019 to over 4 million in 2023.
As a substitute of studying from failures, many merchants increase their bets as a result of they’re satisfied that their subsequent wager would be the one which pays off. That is the place overconfidence and selective reminiscence work hand in hand. Traders have a tendency to recollect their successes and attribute them to ability whereas dismissing failures as unhealthy luck, additional reinforcing misplaced confidence.
The results of overconfidence prolong past particular person losses. At a systemic stage, it fuels bubbles and crashes. The 2008 monetary disaster is a basic instance: overconfident banks, traders, and regulators underestimated the dangers of complicated monetary devices, triggering a worldwide meltdown.
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Combating Overconfidence Bias
So, how can we fight this bias? It’s tough, for the bias is as deeply ingrained as our different pondering flaws and is a part of our evolutionary baggage. However there are some methods to mitigate its influence.
Step one is consciousness. Simply as defensive drivers recognise their limits and respect the unpredictability of the highway, disciplined traders acknowledge the inherent uncertainties of the market and the boundaries of their very own data.
Humility is the best antidote to overconfidence. While you recognise what you don’t know, that’s usually extra helpful than asserting what you suppose you recognize.
Then, sensible methods like diversification and adopting a long-term perspective can even assist mitigate the results of overconfidence.
One other necessary thought is studying from errors. Overconfident traders usually fail to mirror on their failures, blaming exterior components as a substitute. However if you take accountability for poor choices and analyse what went improper, that may present you invaluable classes and assist stop the repetition of pricey errors.
Ultimately, the teachings from India’s roads and its inventory market are clear: overconfidence is a silent killer. Whether or not it results in a deadly crash or a monetary wipeout, the underlying psychology is identical.
The answer lies in humility, self-awareness, and disciplined decision-making. Simply as a defensive driver ensures their security by respecting the boundaries of their automobile and the unpredictability of the highway, a prudent investor safeguards their wealth by recognising the boundaries of their data and the uncertainty of the market.
In the end, the important thing to overcoming overconfidence bias is to not suppress confidence totally however to stability it with warning and realism. The truth is, if you mood confidence with humility, it turns into a strong device for coping with the uncertainties of life and investing—whether or not on the freeway or within the monetary markets.
Disclaimer: This text is revealed as a part of a joint investor schooling initiative between Safal Niveshak and DSP Mutual Fund. All Mutual fund traders must undergo a one-time KYC (Know Your Buyer) course of. Traders ought to deal solely with Registered Mutual Funds (‘RMF’). For more information on KYC, RMF & process to lodge/ redress any complaints, go to dspim.com/IEID. Mutual Fund investments are topic to market dangers, learn all scheme associated paperwork
