“Overconfidence bias”: a limited number of selected shares as opposed to diversification
The singer who enjoys singing in their free time and decides to audition on a TV show – only to fail miserably. The friend who never asks for directions but regularly gets lost. Overconfidence is something we’re all familiar with. Investors also tend to overestimate their knowledge or the reliability of available information. They are too optimistic, and they believe they can “outfox” the market. This often means they rely on just one supposedly “good” share rather than reduce the risks by diversifying. Investors frequently rate companies that they are more familiar with too positively. They might be relying on information provided by people they know, have already examined the company in depth, or they know the company from their own region. This quickly leads to investors giving preference to this particular company despite the fact a different investment would yield a better return.