§ 01
| Overconfidence Type | Manifestation | Cost |
|---|---|---|
| Prediction overconfidence | 90% confidence intervals that contain the truth only 50% of the time | Underestimate risk ranges |
| Illusion of knowledge | More research = more confidence (but not more accuracy) | Over-concentration in ‘high conviction’ positions |
| Illusion of control | Believing your trading strategy controls outcomes | Ignoring market risk |
| Self-attribution | Wins are skill, losses are bad luck | Never learn from mistakes |
§ 02
The Barber and Odean study of 66,000 brokerage accounts found that the most active traders earned 6.5% less annually than the least active traders. Overconfidence drives excessive trading, and trading costs destroy returns.
§ 03
Track your investment predictions for the next 3 months. Write down your expected price target and confidence level. After 3 months, check: Were you as right as you thought you’d be?
§ 04
You’ve picked 3 stocks that beat the market this year. You’re confident your stock-picking skill is above average. Is this confidence justified?
§ 05
Five questions · AI feedback
Sit with the ideas.
An investor with a $500K portfolio executes 200 trades/year at $10 commission and gives up an estimated 0.5% per trade to bid-ask spread (assume average position size $50K). What is the approximate total annual cost of this trading?
Why: