The Internet is brimming with resources that proclaim, “nearly everything you believed about investing is incorrect.” However, there are far fewer that aim to help you become a better investor by revealing that “much of what you think you know about yourself is inaccurate.” In this series of posts on the psychology of investing, I will take you through the journey of the biggest psychological flaws we suffer from that causes us to make dumb mistakes in investing. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.
Not a year passes without the sobering news of a distant relative or acquaintance losing their life in a road accident. This reminder flashes before me every time I start my car. And so, I pause to say a silent prayer for a safe journey even for a short trip to the neighborhood.
My wife, however, carries an even deeper fear of road mishaps, especially when it comes to two-wheelers. A few years ago, after considerable persuasion, she reluctantly “allowed” me to fulfil a long-held dream: owning a Royal Enfield motorcycle. That day felt like a personal milestone. Yet, the joy was short-lived. Just three months later, she “forced” me to sell it off after two of our neighbours were seriously injured in motorcycle accidents.
I tried to reason with her and explained about base rates and how a couple of incidents among millions of riders shouldn’t be a cause for alarm. But her response left me speechless: “I don’t care if the probability is one in a million because, for me, you are one in a million.” That was the end of the debate. Some arguments don’t need logic to be won!
While her decision stemmed from personal concern, it’s impossible to ignore the dark, underlying truth about India’s roads. In 2022 alone, nearly 1.68 lakh lives were lost to road accidents, a statistic that keeps India as the global leader in traffic fatalities. Not just that, another 4.4 lakh people were injured during road accidents, including close to 2 lakh who were grievously injured.
As you can see from the table above, the reasons for tragedies on Indian roads go far beyond poor infrastructure. Reckless driving and misplaced confidence are deeply entrenched in our road culture. It’s a common sight—drivers weaving dangerously through traffic, overtaking on blind curves, or hurtling down potholed or poorly lit roads.
The epidemic of distraction compounds the problem. Look around, and you’ll see every second driver glancing at their phone, either texting or immersed in a Bluetooth-enabled conversation.
The mindset behind such behaviour is consistent. “I’m too skilled for anything to go wrong. Accidents happen to others, not to me.” Or, “It’s just a matter of five seconds. What could possibly happen if I check my phone while driving for five seconds?”
Here’s some math: at a speed of 60 km/h, you cover 83 meters in those “harmless” five seconds. Many drivers in India easily hit speeds of 80-100 km/h, covering 110-140 meters in the same time frame. That’s more than enough distance to cause a fatal accident, endangering not just yourself but countless others.
Why, then, do so many of us engage in such risky behaviour? One cultural explanation I can think of lies in India’s history of scarcity. Growing up in a country long defined by limited resources, many of us were conditioned to adopt a “me first” mindset. Whether it’s overtaking on the road, cutting a queue, or cornering opportunities, we’ve been trained to grab our share of the pie before someone else does. This scarcity-driven mentality often shows up as selfishness and rashness, not just on the roads but in classrooms, offices, social media, and even homes.
But scarcity isn’t the only factor at play. Another powerful force driving this behaviour is overconfidence bias, which is today’s topic in this series on the psychology of investing.
Overconfidence Can Kill…Others, Not Me
Overconfidence is the tendency to overestimate one’s abilities, knowledge, or control over outcomes. On the roads, it convinces drivers that they are invincible, that their skills are unparalleled, and that accidents are things that happen to others. It’s the same bias that leads many to gamble recklessly in the financial markets.
Consider the state of the Indian stock market today. With the explosion of trading apps and online communities, investing has increasingly taken on the air of a casino. Stories of overnight riches lure record numbers of retail investors into speculative trading, turning the market into a high-stakes gamble.
SEBI’s Sept. 2024 report paints a stark picture: over 93% of day traders in India lose money, yet the number of new traders continues to soar. Why? Because they believe the rules of probability don’t apply to them. They are convinced they’ll be part of the lucky minority who beats the market, even when evidence overwhelmingly suggests otherwise.
This is overconfidence bias at its peak— where one believes their instincts, knowledge, or skills can defy the statistical odds, despite evidence suggesting otherwise.
Interestingly, this problem isn’t uniquely Indian. Overconfidence bias is a universal cognitive distortion, deeply rooted in human psychology. Studies show that most people consistently rate themselves as “above average” in intelligence, skill, or decision-making—a statistical impossibility. For example:
- 80% of drivers believe they are better than the average driver.
- 90% of professional money managers think they outperform the average.
Such illusions of superiority extend to investing, where overconfidence leads people to overestimate their ability to pick winning stocks or funds, underestimate risks, and assume they have more control over outcomes than they actually do.
It’s the same mental error that convinces a driver to speed on a slippery road, believing they’re too skilled to lose control.
The parallels between reckless driving and reckless investing are striking. Both involve a disregard for risk and an inflated sense of control. On the road, this manifests as overtaking on blind spots or ignoring safety protocols. In the market, it results in speculative trading, over-leveraging, and ignoring the principles of diversification.
SEBI’s data illustrates this vividly: even though most retail traders lose money, the number of participants in derivative markets grew by eightfold in just five years—from under half a million in 2019 to over 4 million in 2023.
Instead of learning from failures, many traders raise their bets because they are convinced that their next bet will be the one that pays off. This is where overconfidence and selective memory work hand in hand. Investors tend to remember their successes and attribute them to skill while dismissing failures as bad luck, further reinforcing misplaced confidence.
The consequences of overconfidence extend beyond individual losses. At a systemic level, it fuels bubbles and crashes. The 2008 financial crisis is a classic example: overconfident banks, investors, and regulators underestimated the risks of complex financial instruments, triggering a global meltdown.
The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life.
This is a masterpiece.
– Morgan Housel, Author, The Psychology of Money
Combating Overconfidence Bias
So, how can we combat this bias? It’s difficult, for the bias is as deeply ingrained as our other thinking flaws and is part of our evolutionary baggage. But there are some ways to mitigate its impact.
The first step is awareness. Just as defensive drivers recognise their limits and respect the unpredictability of the road, disciplined investors acknowledge the inherent uncertainties of the market and the limits of their own knowledge.
Humility is the most effective antidote to overconfidence. When you recognise what you don’t know, that is often more valuable than asserting what you think you know.
Then, practical strategies like diversification and adopting a long-term perspective can also help mitigate the effects of overconfidence.
Another important idea is learning from mistakes. Overconfident investors often fail to reflect on their failures, blaming external factors instead. But when you take responsibility for poor decisions and analyse what went wrong, that can provide you invaluable lessons and help prevent the repetition of costly errors.
In the end, the lessons from India’s roads and its stock market are clear: overconfidence is a silent killer. Whether it leads to a fatal crash or a financial wipeout, the underlying psychology is the same.
The solution lies in humility, self-awareness, and disciplined decision-making. Just as a defensive driver ensures their safety by respecting the limits of their vehicle and the unpredictability of the road, a prudent investor safeguards their wealth by recognising the limits of their knowledge and the uncertainty of the market.
Ultimately, the key to overcoming overconfidence bias is not to suppress confidence entirely but to balance it with caution and realism. In fact, when you temper confidence with humility, it becomes a powerful tool for dealing with the uncertainties of life and investing—whether on the highway or in the financial markets.
Disclaimer: This article is published as part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund. All Mutual fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (‘RMF’). For more info on KYC, RMF & procedure to lodge/ redress any complaints, visit dspim.com/IEID. Mutual Fund investments are subject to market risks, read all scheme related documents
