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Pride & Overconfidence

pride & overconfidence in tradingConfidence, is universally acknowledged to be an integral element of success and personal achievement. In trading, being confident about our decisions is similarly very important in order not to fall into the famous analysis-paralysis trap and for being able to continue our effort even after losses.

So when does this necessary,positive attribute becomes not so helpful? Confidence is closely related to pride, a pleasant, often exciting emotion that gives us a sense of superiority or greater merit with regards to our accomplishments.  There’s nothing wrong with feeling a bit too good about yourself, right? Let’s for a moment hypothesize that pride itself  doesn’t do any harm.

Pride isn’t so offending but what about pride in excess? There is a very thin line that separates “feeling good about yourself” and feeling extremely good about yourself. Feeling you can make no mistakes and that you are the best, you are the man and you compare to none. You are much better than anyone else. You can see what others cannot see. You can achieve what others cannot achieve. You are invincible. If you ever feel like that, you may  have crossed the line; your emotional state has become hubris. Hubris is an ancient Greek notion, and although in Ancient Greece it was used in a different context, in modern days, it mainly denotes arrogance and overconfidence.

Men tend to be more overconfident than women investors and that is probably due to the effects of testosterone as explained in “The Role of Hormones in Trading Behaviour. Neuroscientist and former Wall street trader John Coates writes: ” When traders enjoy an extended winning streak they experience a high that is powerfully narcotic. This feeling, as overwhelming as passionate desire or wall-banging anger, is very difficult to control. Any trader knows the feeling, and we all fear its consequences. Under its influence, we tend to feel invincible, and to put on such stupid trades, in such large size, that we end up losing more money on them than we made on a winning streak that kindled this feeling of omnipotence in the first place.”

In conclusion, we could say that overconfidence makes traders more likely to overestimate the correctness and precision of their predictions and trade excessively, that means take trades that they never meant to according to their trading plan, and in sizes that defy risk management rules.