Which statement best describes overconfidence?

Question

BlackTom AI · Accepted Answer

Question: Which statement best describes overconfidence?

Option a: 'It is the same as optimism.' While optimism is a positive outlook about future outcomes, overconfidence refers to overestimating one’s own abilities or the accuracy of one's beliefs. The two are not identical, so this statement is misleading/incorrect.

Option b: 'It will not lead to illusion of control' Overconfidence can contribute to the illusion of control, where a person believes they can influence outcomes beyond their actual control. Saying it will not lead to illusion of control is incorrect because overconfidence often fosters that illusion.

Option c: 'It will not lead to illusion of knowledge' Overconfidence can create or reinforce an illusion of knowledge, making someone believe they know more than they actually do. This option incorrectly asserts that it does not lead to such illusion, so it is false.

Option d: 'It leads to excessive trading and underperformance of investors.' This statement aligns with behavioral finance findings: overconfidence can cause investors to trade more than is optimal, incur higher costs, and potentially underperform as a result of poor timing and excessive activity. It correctly captures a negative impact of overconfidence in investing contexts.

Option e: 'It causes investors to underestimate their skills.' Overconfidence typically involves overestimating one's skills, not underestimating them. This option reverses the actual effect and is therefore inaccurate.

Summary: Among the options, the one describing a real consequence associated with overconfidence in investing—excessive trading and potential underperformance—is option d. It distinguishes overconfidence from simple optimism, highlights its relation to illusory control/knowledge, and contrasts with underestimating skills.

Which statement best describes overconfidence?

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