"Markets are crazy and there are a lot of panicked investors... Thank god I'm not one of them!"
We have heard some variation of that comment. "Markets are crazy. I am not. Those other investors are irrational and don't know what they are doing." Yet, believing that you are superior to your peers is a recipe for disaster. Traders and investors need to be confident with their decisions, but superiority will generate bad behavior. This is the conclusion of some recent work in experimental psychology. (See, "Is belief superiority justified by superior knowledge?")
There is belief confidence which is an absolute measure, and belief superiority which is a relative measure. Both confidence and superiority can be problematic for effective decision-making. In the case of belief superiority, someone who perceives their views are superior to others will have a greater gap between perceived and actual knowledge. Those that feel less superior will either have a smaller gap or even a negative gap. The person who has belief superiority will also seek out stories and news that are belief congruent or consistent with their own views.
Belief superiority is consistent with the Dunning-Kruger effect which finds that the least skilled often overestimate their abilities. Many want to be around the guy who exudes superiority relative to others; the one who is not just confident but seems to be better than the pack, yet that can be a recipe for disaster given the knowledge gap. That analyst or talking head who seems so confident may be wrong. You don't want to be that guy who thinks he his beliefs are superior to other. Still, there is hope.
Those who think of themselves as superior but are given strong feedback to show their short-comings will respond and seek out alternative views. A splash of cold hard reality will lead to change. Be a skeptic and if confronted with the person who believes he is better than his peers, make sure he has to face reality with strong truthful feedback.
There is belief confidence which is an absolute measure, and belief superiority which is a relative measure. Both confidence and superiority can be problematic for effective decision-making. In the case of belief superiority, someone who perceives their views are superior to others will have a greater gap between perceived and actual knowledge. Those that feel less superior will either have a smaller gap or even a negative gap. The person who has belief superiority will also seek out stories and news that are belief congruent or consistent with their own views.
Belief superiority is consistent with the Dunning-Kruger effect which finds that the least skilled often overestimate their abilities. Many want to be around the guy who exudes superiority relative to others; the one who is not just confident but seems to be better than the pack, yet that can be a recipe for disaster given the knowledge gap. That analyst or talking head who seems so confident may be wrong. You don't want to be that guy who thinks he his beliefs are superior to other. Still, there is hope.
Those who think of themselves as superior but are given strong feedback to show their short-comings will respond and seek out alternative views. A splash of cold hard reality will lead to change. Be a skeptic and if confronted with the person who believes he is better than his peers, make sure he has to face reality with strong truthful feedback.
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