Over-confidence clouds investment choices

financial advice

6 October 2006
| By Tara Hayes |

In the world of investment banking and financial advice, over-confidence is used too often as a proxy of skill.

This is the opinion of James Montier, global equity strategist at Dresdner Kleinwort Wasserstein Securities, who spoke yesterday at the MLC Basic Instinct Irrational Minds conference in Sydney.

“Experts do know more about [their expert field than the average person] but excess knowledge translates to excess confidence,” Montier said.

Montier also said that in addition to over confidence, self-attribution bias and hindsight bias, can be used to explain bad investment choices.

Self-attribution bias is when good outcomes are attributed to skill but bad outcomes are attributed to ‘sheer bad luck’.

Montier said a good way to avoid self-attribution bias was to construct a four-quadrant matrix and rate the outcome of every investment decision you make.

For example, a wrong investment decision can be reached as a result of wrong or right reasoning.

Awareness of how the decision-making process has contributed to a right or wrong investment choice is the first step in learning from any mistakes that may have been made along the way.

“People don’t learn from their mistakes. When something goes our way, we attribute it to our skill but when something goes wrong, we don’t know why we’re making mistakes,” Montier said.

Hindsight bias is when events in the past appear simple and predictable in comparison to events in the future.

“(Analysts) are good at telling us what’s just happened. They only change their mind when it’s irrefutable they were wrong,” Montier said.

Montier has a number of tips to help investors make better decisions and avoid the traps of self-attribution and hindsight bias.

“Be less certain in your views, aim for timid forecast and bold choices, and don’t get hung up on one technique, tool, approach or view,” Montier said.

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