We are all above average
A recent survey of American motorists by The Allstate Corporation provided further evidence of how much we are prone to overconfidence. The survey found that while nearly two-thirds of American drivers rate themselves as “excellent” or “very good” drivers, they also say that just 29 percent of their close friends and 8 percent of drivers from other states are deserving of the same rating. More men consider themselves as excellent drivers (36 percent) than women (26 percent).
The survey also found that actual driver behaviour does not gel with the glowing self ratings. 45 percent of respondents said they have driven when excessively tired, 15 percent said they have driven when under the influence and 34 percent admitted to sending a text message or email while driving. More than half said they have been involved in an accident but only a quarter of them admitted the accident was their fault.
Like motorists, investors are also prone to overconfidence. We are confident that our stock picks will provide us with above average returns. Even worse, we fool ourselves into thinking that our investment returns are better than they actually are. Michael James recently quoted one such study that found that investors overestimated their returns by 11.6 percent a year.