Trading Psychology | Optimism Bias – Why Most People Think They Can Beat the Market

Most people have heard of “rose-tinted glasses” and know that those who wear them tend to view the world with undue optimism. Studies have shown that with respect to most positive traits, for example driving ability, good looks, sense of humour, physique, etc, most people tend to rate themselves as above average. Logically speaking, this is not possible.

 

Optimism Bias - Why Most People Think They Can Beat the Market

Optimism Bias – Why Most People Think They Can Beat the Market

 

Traders, too, tend to be overly optimistic about the markets, the economy, the economy, and the potential for positive performance of the investments they make. Many overly optimistic traders believe that bad investments will not happen to them – those only afflict “others”. Such oversights can damage portfolios because people fail to mindfully acknowledge the potential for adverse consequences in the investment decisions they make.

Optimism can cause traders to think that they are getting above-market returns, when in fact they need to take into account things like inflation, commissions, and whether they would be better off simply buying an index fund.

Another danger is when traders read too much into rosy forecasts about the economy or a particular earnings forecast, which could cause them to take larger or more risky positions than they should due to “hope”.

What is the biggest danger of this bias?

“Comedy is acting out optimism.”

– Robin Williams

Cheers
Spencer
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Spencer Li is a trader, investor & entrepreneur who achieved financial freedom at 27 (2013), having to date accumulated a diversified portfolio of properties, stocks, REITs, and 10+ businesses across different industries. As a professional trader, he has over 10 years of market experience, and has been featured on more than 20 occasions in the media.

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