Episode 12: Overconfidence

In today's episode, we'll dive into the fascinating topic of overconfidence and its implications in the world of finance and decision-making.

Link to the 10 Question Overconfidence Survey (Links to an external site).: https://butler.qualtrics.com/jfe/form/SV_3CnkB2H2MN44dQF 

Overconfidence is a cognitive bias that can lead individuals to overestimate their abilities, knowledge, and the accuracy of their predictions.

Behavioral finance helps us understand how financial decisions around things like investments, payments, risk, and personal debt, are greatly influenced by human emotion, biases, and cognitive limitations of the mind in processing and responding to information.

It's important to understand behavioral finance because analyzing this theory allows professionals to understand why individuals make certain decisions with their finances and how these decisions affect the economy. Professionals can use behavioral finance concepts to explain to customers the difference between a rational business decision and one that considers personal bias and impartial tendencies.

By understanding how and when people deviate from rational expectations, behavioral finance provides a blueprint to help us make better, more rational decisions when it comes to financial matters.

Behavioral finance shows that individuals may not necessarily make decisions on the basis of a rational analysis of all the information. This can lead to movements away from a fair price for an individual company’s shares, and the market as a whole to a period where share prices are collectively very high or low.

Clicking the timestamps below for a quick view of every action.

00:00 Introduction 
01:55 Take the 10 Question Survey (Click on the link above to take the survey yourself)
05:10 Answers to the Survey 
08:40 Defining Confidence vs. Overconfidence 
10:35 4 Manifestations of overconfidence: Miscalibration
12:13 4 Manifestations of overconfidence: Better-than-Average Effect
13:10 4 Manifestations of overconfidence: Illusion of Control
14:40 4 Manifestations of overconfidence: Excessive Optimism
16:40 Bucket of Water Vs. Bale of Hay - Underconfidence Example
19:20 Who are Most Overconfident - 3 Main Drivers - Male, Education, Math Abilities
22:23 Why We Don't Learn from Our Mistakes - Self-Attribution Bias
25:09 Why We Don't Learn from Our Mistakes - Hindsight Bias
26:10 Why We Don't Learn from Our Mistakes - Confirmation Bias
30:40 Overconfidence in Financial Markets - Retail Traders
33:05 Excessive Optimism and Stock Analysts

I hope you enjoy the content and learn all about the topic of Behavioral Finance. I've set up the first few podcasts as mini-lectures of my Behavioral Finance course that I teach at Butler University each semester. The goal of this podcast is to provide a comprehensive look into the topic of Behavioral Finance - for free!

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