Investors’ Overconfidence in Behavioral Finance

Investors’ Overconfidence in Behavioral Finance
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Investors’ Overconfidence in Behavioral Finance
Source: Riepe, M. W. (2018, February 12). Is overconfidence affecting your investing outcomes? Charles Schwab Magazine. Retrieved from /resource-center/insights/content/is-overconfidence-affecting-your-investing-outcomes.
Behavioral finance
Behavioral finance entails studying the investors' behaviors and how it affects their decisions in financial analysis. Indeed, it shows that investors are irrational, and their behaviors can lead to risky investment decisions. In some instances, investors are significantly influenced by their biases. Behavioral finance portrays that investors are not always rational and that they have self-control limits. These individuals are not "investing machines" that make the right decisions all the time. Psychological behaviors influence the outcome and return on the stock market. Investors' cognitive errors can result in wrong decisions. Behavioral finance is a crucial discipline that shows how psychological biases and influences can affect investors' and financial practitioners' behaviors.
Relevancy with the Course
I selected Riepe's news article since it relates to behavioral finance. One of the areas we have covered in the lectures is overconfidence. In particular, behavior finance has made it clear that investors' psychological behaviors significantly affect their investment decisions. The article shows the consequences of overconfidence in investment. For example, it has enabled me to understand how many investors lose more money when they trade more. When investors make profits, they trade more to maximize their financial outcomes. In that case, they can get more money or undergo huge losses. Some investors are overconfident such that they continue to invest when they make losses, thinking that it is a strategy to recover what they have lost. However, these financial analysts might undergo significant loss due to overconfidence, which affects them adversely. Riepe's article is a reflection of numerous concepts that we have covered in the lectures. Indeed, it shows how overconfidence in investing is a dangerous behavior that can lead to consecutive losses. The most significant thing about the article is that it suggests different ways to overcome overconfidence, which we had already discussed in the lectures. Consequently, the article enables one to see how overconfidence in investment can negatively impact financial analysts.
Reason to Select News
I selected Riepe’s article since it is very informative and clear about the effects of overconfidence in investment. When we were discussing behavioral finance, the professor mentioned that overconfidence could lead to huge losses for invest...