A vast array of cognitive biases hamstring trader performance a quick look at any list of these afflictions will offer up the following –
Confirmation Bias
Hindsight Bias
Narrative Fallacy (my favourite)
Anchoring Bias
Loss Aversion
Attribution Bias
Overconfidence Bias
But if I were to isolate one in particular, it would be overconfidence. The interesting thing about overconfidence is the paradox it presents in traders. You have to be confident to feel you can make it as a trader but this confidence has to be tempted by a degree of realism. To give you an example of overconfidence and the detachment it brings from reality I once had someone approach me about doing our Mentor Program. But they insisted they could only do the program if it could generate a system that fulfilled the following conditions.
- Traded FX.
- Used five-minute charts.
- Required no monitoring.
- Had a guaranteed return of 20% per month.
Using their requirements I did a quick calculation on what a starting capital of $100,000 would be after 10 years. The final result was $317,504,237,378,032.20 – that is $317 trillion. When I pointed out that this was only a little short of the total net private wealth of the entire world their response was…..SO?
With overconfidence comes a detachment from reality that is at times both comical to others and dangerous to the individual.
What is interesting about overconfidence and the disconnect from reality is its global application. People are generally not just overconfident and unrealistic about one thing – they are overconfident and unrealistic about everything they do.
As a case in point consider the graphic below – some 25% of Britons believe that they could qualify for the next Olympic Games if they started training now.
What is more ridiculous is that if you look at the graphic below you can see that 6% believe they could qualify for the 100 metre sprint.
For context, since 1968 only 190 men have run 100 metres in under 10 seconds which is 0.000002% of the world’s population. Yet 6% of Britons believe that in under four years, they could compete with such athletes.
Is it any wonder that people are overconfident as to their ability to trade.
