The danger of an overconfidence bias is that it makes one prone to making mistakes in investing. Overconfidence tends to make us less than appropriately cautious in our investment decisions. Many of these mistakes stem from an illusion of knowledge and/or an illusion of control.

How overconfidence might affect decision making?

“However, too much confidence was associated with lower metacognitive ability,” co-first author Mr Trautwein added. When combined, the results indicate that although being confident entails a reward-like component, it can lead to overconfidence which in turn can undermine decision making.

What does overconfidence lead to?

Overconfidence bias can cause people to experience problems because it may keep them from properly preparing for a situation or may cause them to get into a dangerous situation they are not equipped to handle. Review some examples of the three main types of overconfidence to help better understand the concept.