OverconfidentMarch 31, 2021 -
Categorized in: IAG News
How would you feel after successfully making 49,000 consecutive free throws, executing 49,000 perfect days of parenting in a row, or assembling 49,000 flawless motorcycles?
Doing something perfectly 50 times a day, seven days a week, for 32 months can certainly build your confidence. You may even start to believe that your skills are infallible.
Overconfidence can be the beginning of disaster, and the last week provided two very different yet similar outcomes driven by overconfidence.
Roughly 49,000 ships passed through the Suez Canal without a major incident between July 2018 and March 2021. Then last Tuesday the captain of the Ever Given attempted to navigate a narrow canal in high winds without assistance from tug boats.
One experienced captain’s overconfidence (at least that is what it appears to be thus far) severely impacted millions of people whose livelihoods depend on goods smoothly sailing through the Suez Canal.
In investing, leverage can be your best friend and worst enemy. Many hedge funds have borrowed funds successfully over the years to boost their overall returns to investors. However, leverage has a dark side for the overconfident.
Last week Friday a fairly large investment firm called Archegos Capital was forced to sell millions of shares of stock after the manager did not have the cash required to maintain the debt he used to buy his shares. This forced liquidation caused a significant decline in the stock prices of specific companies.
One experienced manager’s overconfidence impacted hundreds of thousands of shareholders who hopefully held more diversified and less leveraged portfolios.
Even if you do manage to catch 49,000 straight balls thrown your way, the next ball still has a chance to break your streak. All it takes is for a gust of wind or an errant throw to introduce the reality of fallibility to your overconfidence.
Whether you are piloting a ship, investing your portfolio, or driving on the highway, be aware that your overconfidence can lead to crashes.
Quote of the week: Daniel Kahneman: “Overconfidence is fed by the illusory certainty of hindsight.”
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