Camille Van Vyve
29 Jan 2026
Overconfidence: The Cognitive Bias That Costs Investors the Most (and How to Protect Yourself from It)
Overconfidence bias occurs when the confidence we place in our judgements exceeds their actual accuracy. In investing, this often means overestimating knowledge, underestimating risks, and placing too much trust in personal judgement, which can lead to poorer long-term results.
Most investors assume that losses come from bad markets. In reality, they more often come from bad decisions made during those markets.
Researchers have identified around 180 cognitive biases that influence how we think and make decisions. According to Daniel Kahneman, psychologist and Nobel Prize laureate in Economic Sciences for his work on judgment and decision-making under uncertainty, one of the most damaging of all is overconfidence.
Why overconfidence is so costly for investors
Research in behavioural finance consistently shows that overconfident investors:
Take more risks
Investors believe negative outcomes are less likely to happen to them, which leads to excessive risk-taking. This often shows up as concentrated portfolios, oversized positions, or the belief that diversification is unnecessary because they feel confident in their judgement. The result is portfolios that depend on being right, rather than being resilient across different market conditions.
Make more decisions
Overconfidence leads investors to make more investing decisions. And research shows that investors who trade more frequently tend to earn lower net returns after costs. More decisions may feel productive, but in practice they increase mistakes, transaction costs, and the risk of reacting to short-term noise instead of sticking to a long-term plan.
Earn lower returns over time
Taken together, higher risk-taking and excessive decision-making translate into weaker outcomes. Across studies, the pattern is consistent: overconfident investors tend to earn lower risk-adjusted returns over time, largely because their behaviour undermines the benefits of diversification, discipline, and compounding.
How overconfidence shows up in real investing decisions
International surveys consistently show that most drivers, across countries and age groups, believe they are better than average behind the wheel.
Except that, statistically, it’s impossible. We cannot all be above average.
So why do we feel so confident about our driving abilities?
Because overconfidence pushes us to believe we are better at certain things than we actually are. More precisely, the confidence we feel in our judgments tends to be higher than their actual accuracy.
This tendency doesn’t stop at the road. Research shows that doctors overestimate the accuracy of their diagnoses, employees overestimate how quickly they can complete tasks, and people in general overestimate how much control they have over events.
In other words, it is a widespread feature of human behaviour.
In investing, however, it takes particularly costly forms. And it doesn’t look the same for everyone. Overconfidence acts as an umbrella bias, expressing itself through different patterns depending on experience, context, and past outcomes.
Here are three common scenarios where it shows up:
1. “I’ve found the next big winner”
A first-time investor becomes convinced they’ve identified a company with exceptional potential and invests most of their capital in a single stock, believing diversification would only reduce returns.
What’s happening? With limited experience, investing can appear simpler than it really is. This is the Dunning–Kruger effect: when a lack of knowledge leads to overconfidence. The result is a concentrated portfolio that depends on one decision going right, rather than being built to absorb uncertainty.
2. “I knew it would work”
An investor makes a risky investment that turns out very well. Years later, looking back on the strong performance, they remember the decision as obvious and well judged, while downplaying how uncertain and risky it actually was at the time.
What’s happening? This is hindsight bias. Once outcomes are known, past decisions tend to look clearer and safer than they really were. Over time, this reshapes how investors remember their track record, making successes feel earned and risks easier to forget.
3. “My wins are skill, my losses are bad luck”
When investments perform well, the investor credits their own insight or skill. When investments perform poorly, losses are blamed on bad timing, market conditions, or external events beyond their control.
What’s happening? This is self-serving bias. Successes are taken as proof of skill, while mistakes are explained away. Over time, this makes it harder to learn from losses and easier to repeat the same decisions with growing confidence.
How to tell if overconfidence is affecting you
“Overconfidence is a very serious problem. If you don’t think it affects you, that’s probably because you’re overconfident.” The Behavior Gap, Carl Richards, p.17
Overconfidence is hard to detect from the inside. Two simple approaches can help.
1. Ask uncomfortable questions
- Do I believe my past successes guarantee future results?
- Do I dismiss advice that contradicts my views?
- Do I feel compelled to “do something” when markets move?
- Do I believe I can time entries and exits reliably?
- Do I underestimate how much luck played a role in my results?
If these questions trigger defensiveness rather than curiosity, that’s already a signal.
2. Test your calibration
A classic way to measure overconfidence is to compare confidence levels with actual accuracy by asking people how confident they are in the accuracy of their answers to a series of questions.
If human confidence were perfectly calibrated, answers given with 100% confidence would be correct 100% of the time, those given with 90% confidence would be correct 90% of the time, and so on.
Calibration tests highlight the gap between how confident we feel about our judgments and how accurate those judgments actually are.
Want to try it yourself?
Michael Mauboussin, investor, expert in decision-making and behavioural finance, and author of The Success Equation, has published an online test.
The structural solution: reducing overconfidence by design
The most effective way to manage overconfidence is not to try harder to be humble. It’s to remove as many discretionary decisions as possible.
This is where a disciplined, long-term, index-based approach becomes powerful.
How Easyvest’s approach limits overconfidence-driven errors
Easyvest is designed to help investors reduce the impact of common psychological biases.
- Broad diversification reduces the temptation to make decisions based on conviction rather than evidence.
- Long-term horizon shifts focus away from timing and prediction, which are precisely where overconfidence does the most damage.
- Minimal intervention means fewer opportunities for bias to creep in.
In short, overconfidence bias increases risk-taking and decision-making while reducing long-term investment performance, which is why structured, long-term investing approaches are designed to limit its impact. It’s not about eliminating confidence. It’s about placing it where it belongs: in a robust system, not in personal forecasts.