Effects of overconfidence

Chris Dillow

Chris Dillow

One of the most ubiquitous and dangerous of all the cognitive biases is overconfidence - our tendency to overestimate our abilities and underestimate the margin of error surrounding our beliefs. Nobel laureate Daniel Kahneman has called this the most damaging of all errors of judgement. However, a paper in the latest Journal of Economic Perspectives by Kent Daniel of Columbia University and David Hirshleifer of the University of California at Irvine shows that overconfidence can also explain some systematic patterns in equity returns.

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