Placing too much faith in your knowledge.
Believing that your contribution to a decision is more valuable than
it actually is.
overconfidence pertains to how well people understand their own
abilities and the limits of their knowledge”.
(Hersh Shefrin, 2007)
When People Are Overconfident
Overconfidence can cause a person to experience problems
because he may not prepare properly for a situation or may get into
a dangerous situation that he is not equipped to handle.
Examples of overconfidence include:
A person who thinks his sense of direction is much better than it
actually is. The person could show his overconfidence by going on a
long trip without a map and refusing to ask for directions if he gets
lost along the way.
Effects of overconfidence
Overconfidence effects decision-making,
both in the corporate world and individual
In a 2000 study, researchers found that
entrepreneurs are more likely to display the
overconfidence bias than the general population.
Some succeed in their ventures, but many do not.
Examples from Stock/Finance
Before few years IPO (Initial Public Offering) issues shares of OGDCL.
Price of OGDCL shares at that time is Rs. 32.50.
Top 7 executive of OGDCL creates hype between public.
Public started purchasing shares of OGDCL and price tend to Rs. 192.
And after some time clash is happen between executives.
Suddenly OGDCL share price decreased from 192 to 118.
Example # 2…
Continuously increasing in US dollar price
People become overconfident that price of
US Dollar will always increase in future
they start buying US Dollar blindly
But suddenly prices are fall in 2014
Example # 3…
Stock Market Crash of 1929
most significant crash in U.S. history
Since 1922, the stock market had gone up, not down -- nearly 20% a year
Over the four days of the stock market crash, the Dow jones losing $30 billion in
when the stock market crashed, brokers called in loans. Many people were wiped
out, selling businesses and losing their life savings
Example # 4…
Continuously increasing in Gold price
People start investing in Gold
But after oct-2012 prices start falling
Example # 5…
Mobile Phone coverage was weak
Idea development was technically strong
Technology changed in 1990
Product (Mobile) Launched in 1998
Per Phone Cost 3000$
Moving Cars and inside the building
Bankrupt in 1999
Sell for 25 Million $
Cost 5 Billion $