Behavior Finance 4 – Optimism, Overconfidence, Portfolio Psychologies

Summaries

Optimism means believing that the odd of bad thing to happen is less than what the actual odd should be. This leads to overconfidence. For the result of being overconfidence, please refer to http://minute-class.com/finance/behavior-finance-1/

Illusion of knowledge is usually the cause of overconfidence.

Make sure you understand the relationship between confidence interval, overconfidence and surprises.

Portfolio Psychology:

1/n diversifications – when n investing funds are provided, employee in 401k tends to divide their contributions equally among the funds

Familiarity – employee tends to invest in stocks they are familiar with (e.g. company they are working for, domestic company – home bias)