If you take the risk will you get the reward?

Economics

Many people will make decisions about their investments, but they would not think to make a decision to play a professional basketball player. Why is this? This seems obvious looking at it that the two examples are extremely different. However, people are paid for both of these jobs, and both are based on probabilities and likelihood of events happening. Just because one is an investor and one a basketball player why do we feel so comfortable making the financial choice but not the other? The article I looked at used this comparison to show people’s blatant overconfidence in investing their money. This seems almost astounding considering how much our lives depend on our finances.

They proposed a couple different reasons behind people doing this such as overconfidence, optimism bias, hindsight bias, attribution bias and confirmation bias. However, the overconfidence bias is what most intrigued my attention, because of its implications in many daily events.

In this many people will tend to be overconfident in their predictions of the stock market even though it is highly variable. Even those people paid to do these things find themselves sometimes making the wrong decision. If these people only study this and do this in our minds we know they should be better at it then we would, yet many people welcome this risk. Something about these decisions play into our intuition and our idea that our gut feelings will be correct. It does not matter that as a fact we know very little about economics and finances we have internalized that we are above average in life thus our confidence is also above average.

Research has shown that in fact people’s overconfidence bias is highest when their accuracy is the lowest and shows a reverse correlation for when their accuracy is the highest. People will make estimates in examples like that in class about weights, heights, ages etc., all in number ranges to get to 90% confidence but still most people will not get this many correct. Even with using ranges we believe that we know more or are more accurate even if it is a pure guess with no knowledge.

This article talked about an economics study in particular that found people rated their financial knowledge as advanced, which seemed high. Thinking this the researches had people take a financial test getting the average score of just 61%, much lower than people’s own expectations of advanced financial knowledge. This kind of overconfidence one would think people would not err on, because it could lead to actual monetary deficits but yet they do. This was the most shocking part of the article since in theory most people want to keep their money and not risk it, but theory does not always seem to work out, as this overconfidence shows.

 

http://www.nytimes.com/2016/03/27/your-money/why-we-think-were-better-investors-than-we-are.html?_r=1

2 thoughts on “If you take the risk will you get the reward?

  1. colleenphope

    I found this really interesting, especially because this was an article about risk taking regarding money. I would imagine that people would take less risks with their money, since material things are so important in our culture.

  2. jsullivan12

    I thought this was a very interesting approach. I loved reading the information and it really fascinates me that people take risks with their money because I know that I am very cautious. I would hope that people who be less risky about their money but apparently not! Good post.

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