Through the decades that I’ve been working as a financial advisor, my team has encountered some people who just have a knack for managing money. They have the time, insight, updated knowledge and expertise to know what to own, and when. They’re the sort of people who understand the granular elements of diverse topics like derivatives, RMDs, trusts, and REITs.
I’ve also encountered plenty of people who think they know all about those things, but don’t. Often, they’re just as confident as the experts.
Psychologists call this phenomenon the overconfidence effect – the difference between what people really know and what they think they know. Studies show that, to some degree, we all suffer from the overconfidence effect. It’s part of the human condition to overestimate what we know and our ability to forecast.
The phenomenon isn’t limited to just the financial world: the overconfidence effect is what caused 93 percent of U.S. students to classify themselves as “above average” drivers.[i] It’s mathematically impossible for everyone to be above average – although I’m certain I’m in the “above average” group.
Overconfident driving could lead to getting lost or a fender bender, but overconfident financial expertise could damage years of saving and planning.
One recent study revealed that investors who don’t have a financial advisor perceived themselves as more knowledgeable on key economic topics like central bank policies, global economic growth, and China’s influence on the global economy.
The disparity between those who relied on a financial advisor and those who didn’t was striking in some areas. Those without a financial advisor perceived themselves almost 10 percent more knowledgeable on global economic growth, and 16 percent more knowledgeable on disruptive technologies.[ii]
There’s a chance you understand how tariff talks will affect your portfolio, or how recent changes in tax laws should guide your IRA disbursements – but stop and take an honest account: are you suffering from the overconfidence effect? Are there areas where you could use an advisor who understands your goals and where you are today?
There’s good news – the antidote to the overconfidence effect is to find an advisor you can trust to help you walk through where you are and where you’re headed. Help convert your overconfidence to real confidence in your plan.
[i] Alex Taylor, “Toyota takes on the myth of the above-average driver,” FORTUNE.