optimism and overconfidencethe illusion of control

In the second of a series of articles, MultiManager looks at how an over-relience on financial modelling can lead investors to overlook the chance nature of the markets

In the first article of this series we defined behavioural finance as descriptive, studying how investors make decisions and, more specifically, focusing on common errors of judgment. The first biases we looked at were our predilections for optimism and our (mistaken) confidence in the likelihood of the outcomes we expect. In this article we'll set out an implication of these two and go on to examine some errors in processing information: anchoring and memory biases. The senior investment officer (SIO) of a large investment bank was making a presentation to a prospective client. 'We are a...