Overconfidence

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Definition

The tendency, especially when one has made a smart decision on an investment, to believe that point of view continues to prevail. One of a group of Behavioral Financial Biases that can cloud investors’ judgment. Overconfidence doesn’t necessarily mean one is overly optimistic about the stock market; it can mean one is bearish but too confident in one’s viewpoint. Say you called the rise in Intel (INTC) shares exactly one year ago and have been gratified to see the stock rise 50% during that time, roughly triple the gain in the S&P 500. That’s great, but to avoid overconfidence one should constantly reassess the position. When you bought, Intel shares traded at roughly 12 times forward earnings expectations, but now they’re costing nearly 16 times forward earnings.

INTC Chart

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