Definition: The overconfidence bias refers to the tendency for people to overestimate their own ability or the accuracy of their own predictions. This bias can lead investors to make overly aggressive or risky decisions, and take on more debt than they can handle.
How it Impacts Investors: The overconfidence bias can lead investors to make overly aggressive or risky decisions, based on the belief that they have superior knowledge or abilities. This can lead to significant losses, as investors may be unprepared for negative outcomes or market downturns. For example, an investor may assume that they have identified a sure-fire stock pick, and invest a large sum of money in the stock, only to realize later that their analysis was flawed.
How to Handle: To handle the overconfidence bias, investors should try to be realistic about their own abilities and the accuracy of their own predictions. They can also try to seek out the opinions of other, more experienced investors, and to diversify their investments.
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