https://safirsoft.com Investors' overconfidence is linked to selective memory

Investors increase their success, forget about their losses. They tend to trade more, even if they lose in this way. They take on a lot of debt and do not diversify their assets. When the market suddenly gets into trouble, they tend to overreact. However, despite all this evidence, there is no firm data on what initially makes investors overconfident.

At the wrong cost, you think that people who risk stocks will learn from their past mistakes. But a new study shows that our memories tend to have an optimistic past that prevents people from maximizing their gains and forgetting their losses.

Selective Memory

The actual lack of world data is a bit surprising, given the many reasons one might suspect happy nostalgia here. Previous research has shown that college students remember their grades better than they actually are. Other research shows that people quickly forget their true cholesterol levels and remember the tests as a healthier test. Haneen Saeed for the performance of the previous investment. The first is what they call distortion, which you can call retrospective optimism. People think that their previous trades were better than their performance. The second process involves selective forgetting, in which bad trades are not remembered at all.

To see if they were actually playing, the team ran several tests in which they recruited people. Who has invested in the last year? They asked these investors to remember their performance. These memories are then compared to actual performance based on financial records. Before reviewing the records, participants were also asked if they intended to resell in the near future and whether they expected their assets to have a broader market.

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There was no difference between memory and reality. They were dramatic, but they were consistent. When asked to call a trade, his average profit was 44% in a single trial. The reality showed that it was 40%. When asked for seconds, the difference was even greater: 41% in memory, 34% in reality. In another experiment, participants were asked to write down their last 10 big deals in the past year. People often forget to mention losses about 40% of the time, while gains only 30% of the time erase their memory. Trade with more optimism about being able to beat the market in the future.

Memory as a Warning

To track this potential link between memory and overconfidence, the researchers extracted memory from the equation, and simply asked people to make two significant deals they did research in the past year, which would get them to make all their trades Last. The control group was asked to search for unrelated items. Similar questions were then asked to all these investors about investment return and investment intent. Intent to trade in the near future compared to the control group. It can be easily interpreted by people who want to show their success and confidence. Some of these other factors can play a larger role outside of the research experience. However, there appears to be a real effect here, and selective optimistic memory has been observed in other areas of human behavior. In poor performance in the past, if you search for the phrase "don't focus on your mistakes", you'll find a plethora of pages recommending you do so, along with a plethora of images of self-help slogans. The idea - to be a goldfish - even made its way onto a popular TV show. Maybe it's time to put a star on it to warn people that it may not apply to investing.

PNAS, 2021. DOI: 10.1073/pnas.2026680118 (about DOIs).

Investors' overconfidence is linked to selective memory
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