postingname,postingname wrote:Victoria,VictoriaF wrote:
- active-expert investors suffer from overconfidence.
I agreed with your overall breakdown in your earlier ipost. But now that we're examining the details, the definitions need tweaking.
Expert investors are by definition not overconfident. Egos have no place in trading/investing and good traders/investors are eventually forced to realize that. So I would tweak the definition of experts to account for the fact that most expert investors have, or aspire to have, the type of psychology that includes the mastery of ego issues. Otherwise, they won't be consistently successful.
If we define active-expert investors as the ones who can't lose then, by definition, they always win. But this definition is not very helpful for identifying and mitigating issues that even the greatest experts may face. These issues can be considered at two levels:
- psychology and behavioral economics, and
In BE, overconfidence is one of the best documented biases, and it's present in both successful and unsuccessful subjects. Kahneman, whose initial insights were developed when he was a psychologist in Israel's military, has a paper about "hawkish" biases of strategic thinking, which is heavily rooted in the Israeli politics.
In neuroscience, there is a well-known winner effect of the escalation of risk taking after every win.