Overconfidence bias

Systematically overestimating the accuracy of your own judgement - in particular, being far more certain of a forecast than its track record justifies.

Example

Asked to give a range you are 90% certain contains a company's annual revenue, most people produce a range far too narrow to be right that often. The confidence is real; the accuracy is not.

Important

Overconfidence is worst where you have some knowledge but not much, and it tends to grow with how much you have read rather than with how often you have been right.

Related terms

• Anchoring — Letting the first number you encounter set the reference point for every judgement that follows, even when that number carries no real information about value.
• Circle of competence — The set of businesses, assets or markets you understand well enough to judge what they are worth and what could realistically go wrong with them.
• Variant perception — A view that differs from what the market price already reflects, in a specific way you could check.

Lessons that explain it

• Overconfidence and anchoring — You know less precisely than you feel you do, and the first number you saw is still quietly steering the decision you think you are making freshly. (9 min)

All 578 terms in the Investing glossary