Investor confidence: Are you your own worst enemy?

Abstract

Are overconfident investors more apt to make risky choices, which could erode investor returns? With confidence levels that exceed knowledge levels, investors may unknowingly expose themselves to risk. This paper shows that in terms of investing, overconfidence is associated with increased optimism as well as additional risk-taking through focused investment strategies. Specifically, overconfident individuals are more likely to be overoptimistic about their individual performance as well as overall market performance; more likely to have confidence in market regulations; less likely to seek the advice of an adviser; more likely to trade on margin; more likely to trade commodities, futures, and options; and more likely to have whole life insurance. Overconfidence may help explain why investor returns are consistently lower than investment returns. These findings are particularly relevant for financial advisers, as they serve the important role of providing feedback and sharing in the decision process.

How do students’ digital financial literacy and financial confidence influence their financial behavior and financial well-being?

“…The second hypothesis accepted is financial confidence has a significant effect on students' financial behavior. If a person has low financial knowledge but high financial confidence, they are more willing to engage in risky financial behavior (Asaad, 2015). Financial confidence plays an essential role in managing financial behavior (Morris et al, 2022).…”

The relationships of financial literacy with both financial behavior and financial well‐being: Meta‐analyses based on the selective literature review

“…However, a careful approach is required to improve financial confidence in the same vein as to enhance subjective knowledge. According to previous studies, confidence does not have a linear relationship with financial knowledge or skills (Asaad, 2015;Kim & Yang, 2020). In addition, subjective knowledge related to consumer confidence has been criticized because of the negative effect of overconfidence on financial behavior (Porto & Xiao, 2016).…”

Does good financial behavior reduce the negative impact of financial fragility on individuals’ financial optimism? The never-ending Lebanese crisis case

“…The financial behavior of people is defined in the financial and behavioral literature as how they make daily financial decisions such as spending, saving and sensible investment [16][17][18]. Financial behavior also refers to any features of human conduct that are connected to and relate to the control of money and other resources [19].…”

“…Financial behavior is assessed by looking at people's credit histories, credit ratings, health and life insurance coverage amounts, the sorts of investments they have made and their financial retirement plans [16]. A person who manages their money well never has a check bounce and always makes timely, full credit card payments.…”