Which statement best describes overconfidence?

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BlackTom AI · Accepted Answer

Question recap: The prompt asks which statement best describes overconfidence, with five answer options to evaluate.
Option a: 'It will not lead to illusion of control' This is misleading. Overconfidence can contribute to an illusion of control, where people overestimate their influence over outcomes that are largely uncertain or random. Saying it will not lead to illusion of control contradicts common findings in behavior finance and psychology.
Option b: 'It is the same as optimism.' While related, overconfidence is not identical to optimism. Optimism is a general positive expectation about outcomes, whereas overconfidence involves an inflated belief in one’s own abilities or knowledge beyond what is warranted, often leading to poor judgments.
Option c: 'It causes investors to underestimate their skills.' This is the opposite of overconfidence. Overconfidence typically leads to overestimating one’s skills, not underestimating them, which can result in riskier decisions.
Option d: 'It will not lead to illusion of knowledge' This is incorrect because overconfidence commonly accompanies an illusion of knowledge, where individuals believe they know more than they actually do, even in the face of uncertain or incomplete information.
Option e: 'It leads to excessive trading and underperformance of investors.' This statement aligns with research showing that overconfident investors trade more frequently, incur higher costs, and often underperform due to overtrading, inadequate diversification, or ignoring information that would temper their certainty.
In summary, each incorrect option either confuses overconfidence with related but distinct concepts (optimism), or incorrectly asserts relationships (illusion of control, illusion of knowledge), or states the opposite of the typical consequences. The reasoned interpretation of overconfidence supports option e as the best description due to the link between inflated self-belief, excessive trading, and potential underperformance.

BFF5520 - S1 2025 Practice_MCQs_Topics2_12

Which statement best describes overconfidence?

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