In the Field of Investing, Self-Confidence Can Sometimes Come Back to Haunt You
Sure, this summer's stock market has been rough. But it will get better, right?</br></br>Most of us have bountiful optimism and abundant self-confidence. In many ways, this is a useful trait. Self-confident, optimistic people tend to be happier, more motivated and more likely to persevere. But when we turn to investing, this self-confidence can become a killer.</br></br>"A positive mental attitude, optimism and self-confidence are good attributes," says Steven Thorley, a finance professor at Brigham Young University's Marriott School of Management in Provo, Utah. "But in the financial world, they just don't work. You're not interacting with people. You're interacting with prices. They don't care how you feel that day. In general, overconfidence is a negative."</br></br>Overconfident investors tend to trade too much and tend to bet too heavily on particular stocks or market sectors, says Meir Statman, a finance professor at Santa Clara University in California. These investors think they know more than they really do, and they buy and sell stocks on this "knowledge."</br></br>"Trading volume is higher after a period of high returns," Mr. Statman says. "That is consistent with the notion that people confuse brains with a bull market. They think that, because their portfolio is fatter, they are smarter."