We can't all beat the odds

We all like to thing we are the king/queen of the basketball court, the best lover and the smartest financial guru. No? Just me? Awkward.

We can’t all be in the top 20%. There always has to be a top, a middle, and a bottom. Our chance of winning first division lotto is 1 in 5 million, yet much more than 1 in 5 million think they will be the one. This is known as the overconfidence bias, and it can get us in to a lot of financial trouble.

Confidence can be a great thing. Confidence allows us to take risks and not live in fear of failure. A confident person will make enough decisions to get one right eventually. And it is only the right decision that matters. A confident person will learn from their mistakes, instead of hanging their head and giving up. A confident person is always learning, trying, then doing.

Under confidence can cause financial problems. We aren’t likely to make decisions or take risks. Yes, this means less mistakes will be made, but it also means very little growth and rewards.

The other problem is when confidence translates into over confidence. Like a confident person, an overconfident person will also take risks, but won’t recognise failure as their own fault. All correct decisions will be their own doing and all incorrect decisions will be someone else’s fault. An overconfident person tends to be less educated too. Ironically, the less we actually know, the more we think we know. This is because as we get to know more about topics, the less we realise we knew in the first place.

 

Some examples of overconfidence and its impact on our financials

  • With all the stories of people making millions on the back of Bitcoin, many uneducated people have also jumped on the Bitcoin bandwagon. Bitcoin was going up in rapid value in 2017 and many people thought this will long continue. Everyone buying thought they were going to be a millionaire, but when buying and selling there can only be one winner and one loser. The problem is we don’t hear about the loser stories in the media which feeds into the overconfident person’s mind even more.

  • A lot of individual stock pickers think that they can beat the performance of the overall market. Some will, and the majority won’t. To have results that are lower than that of the market is a classic example of over confidence. Overconfident stock pickers will often purchase shares when they are highly priced, believing that they will never come down. Then they will likely sell when the stock reaches lower prices out of panic or hold on to it out of pride. They think they can time the markets or predict the next crash or next big thing.

  • There are many people in New Zealand that truly believe that the housing market will never crash. That it isn’t possible. Maybe it will, maybe it won’t. The problem is the overconfident belief that it will NEVER happen here. With such a large percentage of New Zealander’s wealth tied up in the housing market, it would be financially wiser to dial back the confidence a bit and prepare for the worst-case scenario.

  • Lotto is overconfidence on a grand scale. Everyone thinks they will be the one to win. The one in five million. Otherwise, why would so many people play? You have much higher odds of being the next New Zealand Prime Minister, or having quadruplets five times over. Ouch. We like to gamble because we like the hope it gives us. No matter how unrealistic. We observe close wins as a success, whilst remembering small wins over all the losses. These mind tricks of ours lead us to our overconfident behaviour. We often think luck will come our way or success is just around the corner. This optimism tricks our mind into thinking our lives are not within our control. Not until we realise that our life IS in our control, can we make positive changes.

  • In New Zealand we tend to have a “she’ll be right” attitude where nothing bad will happen to us. This can lead to being under insured and experiencing a financial disaster in an unlucky event.

 

Final Thoughts

Over (and under) confidence can cost us a lot of money. The best thing we can do is to educate ourselves and be confidently realistic in our expectations. A confident person won’t be afraid to make decisions, but they will also plan for the event that their decisions don’t work out.

As long as we have clear goals in life and make educated decisions that align with our goals, then we are much less likely to suffer large financial losses from overconfident behaviour. As a confident person we will make the best financial decisions based on our beliefs and needs, not other people’s. A confident person isn’t afraid to break free from the herd and do something different if it is in their best interests.

The best financial decision I have made was setting the goal to achieve financial freedom by my late 40’s. I refuse to follow the herd, working 40 years or more in a job I don’t enjoy, retiring at 67. I educated myself, made clear goals, and made a confident decision to break from the herd and take control of my time. An overconfident person would probably look for a get rich quick scheme to achieve early retirement which could go terribly wrong. Stop thinking for you it will be different. It won’t. I much prefer the odds of calculated and steady and am not prepared to gamble on my life.

 

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here

 

Have you suffered from overconfidence? What about under confidence and scared to make decisions? How has this affected you financially?