Overconfidence plays a significant role in trading and investment behaviour, often leading to suboptimal decision-making and increased risk-taking. It occurs when investors overestimate their knowledge, skills, or ability to predict market movements while underestimating the role of randomness and external factors.

In trading, overconfidence can lead to excessive trading activity, as individuals believe they possess superior information or timing. Studies show that overconfident traders tend to trade more frequently, incurring higher transaction costs and reducing net returns. This tendency is often referred to as the overtrading bias.

Overconfident investors may also underestimate risks, leading to concentrated portfolios or disproportionate exposure to speculative assets. This increases vulnerability to market downturns and magnifies losses during adverse conditions.

Overconfidence can also result in ignoring critical information that contradicts one’s beliefs, a cognitive bias known as confirmation bias. This can reinforce poor decisions and limit adaptability in dynamic markets.

Interestingly, overconfidence is more prevalent in bull markets, where rising asset prices may falsely validate over-optimistic assumptions. Addressing overconfidence involves cultivating self-awareness, relying on data-driven strategies, and diversifying investments. By acknowledging and managing this bias, traders and investors can make more rational, informed decisions, improving long-term performance and reducing unnecessary risks.