The internet is brimming with resources that proclaim, “Nearly Everything You Believed About Investing is Incorrect.” However, there are far fewer that aim to help you become a better investor by revealing that “Much of what you think you know about yourself is inacurate.” In this series of posts on the psychology of investment, I will take you through the Journey of the biggest psychological flaws we suffer from that causes us to make dumb mistakes in. This series is part of a joint investor education initiative Between Safal Niveshak and DSP Mutual Fund.
Not a year passes without the sobering news of a distant relative or accountance ling their life in a road accident. This reminder flashes before me every time I start my car. And so, I pause to say a Silent Prayer for a Safe Journey even for a short trip to the neighborhood.
My Wife, however, carries an even Deeper fear of road mishaps, especially when it come to two-beheeles. A less years ago, after considerable person, she released “Allowed” me to Fulfil a long-hand dream: Owning a Royal Enfield Motorcycle. That day felt like a personal milstone. Yet, the joy was short-live. Just three months laater, she “forced” me to sell it offer two of our neighbors was serially invursed in motorcycle accidents.
I tried to reason with her and explained about base rates and how a couple of agents among millions of riders should be a cause for alarm. But her response left me speechless: “I don’t care if the probability is one in a million trust, for me, you are one in a million.” That was the end of the debate. Some arguments do’t need logic to be Won!
While Her Decision Stemmed From Personal Concern, IT’s Impossible to Ignore The Dark, Underling Truth about India’s Roads. In 2022 Alone, Nearly 1.68 Lakh Lives Were Lost to Road Accidents, A Statistic That Keeps India as the Global Leader in Traffic Fatalities. Not just that, Another 4.4 Lakh People Were Injured during Road Accidents, Including Close to 2 Lakh Who WHO WHO WHO WHO WHO WHO WHO WHO WHO WHO WHO WHO WHO WHO WHO
As you can see from the table Above, The Reasons for Tragedies on Indian Roads Go Far Beyond Poor Infrastructure. Reckless Driving and Misplaced Confidence are Deeply Entrenched in Our Road Culture. It’s a Common Sight – Drivers Weavers Dangerly Through Traffic, Overtaking on Blind Curves, or Hurtling Down Potholed or Porly Lit Roads.
The epidemic of distraction compounds the problem. Look Around, and you’ll see every second driver glass at their phone, either texting or immersed in a Bluetooth-enabled conversation.
The mindset behind such behavior is consistent. “I’m too skilled for anything to go wrong. Accidents Happen to others, not to me. ” Or, “It’s just a matter of five seconds. What could passibly happy if i check my phone while driving for five seconds? ”
Here’s some math: at a speed of 60 km/h, you cover 83 meters in that “harmless” five seconds. Many drivers in India easily hit speeds of 80-100 km/h, covering 110-140 meters in the same time frame. That’s more than enjoy distance to cause a fatal accident, endangering not just yourself but countless others.
Why, then, Do So Many of Us Engage In Such Risky Behavior? One Cultural explanation I can think of lies in India’s history of scarcity. Growing up in a country long defined by Limited Resources, many of us was also conditioned to adopt a “me first” mindset. Whether it’s overtaking on the road, cutting a Queue, Or Cornering Opportunities, Weian Trained to Grab Our Share of the Pie Before Someone Else. This scarcity-Dr. Driven Mentality often Shows Up as Selfishness and Rashness, Not just on the roads but in classrooms, offices, social media, and even homes.
But scarcity isn’t the only factor at play. Another Powerful Force Driving This Behavior is overconfidence biasWhich is today’s topic in this series on the psychology of investment.
Overconfidence can kill… others, not me
Overconfidence is the tendency to overestimate one’s abilities, knowledge, or control over outs. On the roads, it convinces drivers that they are invincible, that their skills are unparalled, and that accidents are mades that happy to others. It’s the same bias that leads many to gamble recklessly in the financial markets.
Consider the state of the Indian Stock Market Today. With the explosion of trading apps and online communities, Investing has increased took on the air of a casino. Stories of overnight Riches Lure Record Numbers of Retail Investors Into Speculative Trading, Turning The Market into a High-Stakes Gamble.
Sebi’s sept. 2024 report Paints a stark picture: Over 93% of day traders in India lose money, yet the number of new traders continues to soar. Why? Because they believe the rules of probability don’t apply to them. They are convinced they’ll be part of the lucky minority who beats the market, even when evidence overwhelmingly sugges Other.
This is overconfidence bias at its peak – where one believes their instincts, knowledge, or skills can defy the statistical Odds, Despite Evidence Suggesting OkharWise.
Interestingly, this problem isn Bollywood uniquely Indian. Overconfidence bias is a universal cognitive distortion, deeply rooted in human psychology. Studies show that most people are consistently rated themselves as “Above Average” in Intelligence, Skill, or Decision-Making-A statistical impossibility. For example:
- 80% of drivers belief they are better than the average driver.
- 90% of Professional Money Managers Think they outperform the average.
Such Illusions of Superiority Extend to Investing, Where Overconfidence Leads People to Overestimete Their Ability to Pick Winning Stocks or Funds, Undirestimate Reiss, and Assume Thei The more than more. An They actually do.
It’s the same mental error that convins a driver to speed on a slippery road, believing they’re too too skilled to lose control.
The parallels between reckless driving and reckless investment are striiking. Both involve a disregard for risk and an inflated sense of control. On the road, this manifests as overtaking on blind spots or ignoring safety protocols. In the market, it results in speculative trading, over-leveragging, and ignoring the princess of diversification.
SEBI’s Data Illustrates This Vividly: even thought retail traders Lose Money, The Number of Participants in Derivative Markets Grew by Eightfold in Just Five Years – Forrom UNDER HALF A. Ion in 2023.
I instead of learning from failures, many traders raise their bets because they are convincted that their next belt will be the one that pays off. This is where overconfidence and selective memory work hand in hand. Investors Tend to Remember their successes and attribute them to skill while dismissing failures as bad luck, further reinforcing illicated confidence.
The consequences of overconfidence extended beyond individual losses. At a systemic level, it fuels bubbles and crashes. The 2008 Financial Crisis is a Classic Example: Overconfident banks, investors, and regulators undressed the risks of complex financial instruments, Triggering a Global Meltdown.
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Combating overconfidence bias
So, how can we combat this bias? IT’s Difential, for the bias is as Deeply ingred as our other thinking flaws and is part of our evolutionary bagge. But there some ways to mitigate its impact.
The first step is Awareness. Just as defensive drivers recognize their limits and respect the unpredentability of the road, disciplined investors accounting the inharaties of the market and the limits of the Limits of the Limits of the Limits of the Limit.
Humility is the most effective antidote to overconfidence. When you recognize what you do don’t know, that is often more valuable than asserting what you think you know.
Then, Practical Strategies Like diversification And adopting a long-term person can also help mitigate the effects of overconfidence.
Another Important idea is Learning from mistakes. Overconfident investors often fail to reflect on their failures, Blaming external factors instead. But when you take responsibility for poor decisions and analyse whats want, that can provides you invaluable lessons and help prevent the repetition of costly errors.
In the end, the lessons from India’s roads and its stock market are clear: overconfidence is a silent killer. Whather it leaders to a fatal crash or a financial wipe
The solution lies in humility, self-ashness, and disciplined decision-making. Just as a defensive driver ensures their safety by responding Tainty of the market.
Ultimately, the key to overcoming overconfidence bias is not to suppress confidence entryly but to balance it with caution and realism. In Fact, when you tempor confidence with humility, it becomes a powerful tool for dealing with the uncertainties of life and investment – whether on the highway or in the highest.
Disclaimer: This article is published as part of a Joint Investor Education Initiative Between Safal Niveshak and DSP Mutual Fund. All mutual fund investors have to go through a one-time kyc (Know your customer) process. Investors Should Deal only with Register Mutual Funds (‘RMF’). For more info on KYC, RMF & Procedure to Lodge/ Redress Any Complaints, Visit dspim.com/ieidMutual Fund Investments are Subject to Market Risks, Read All Scheme Related Documents