Overconfidence costs cash

​Read online

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It's a new year, so I've revamped my newsletter.

You'll find a lesson, example, and resource. It's easy to read yet informative.

I hope you like it, let me know what you think.

Lesson: Day Traders Lie

We've all seen content like this online.

It sells the idea that day trading could generate eye-watering riches.

But what's the evidence?

Researcher Terry Odean secured access to 78,000 anonymized trader accounts.¹

He and Brad Barber analyzed returns for frequent traders (day traders) and buy-and-hold investors.

The results?

• Day traders earn 11.4% annually.

And yet:

• Buy-and-hold investors earn 17.9% annually.

Despite what YouTube gurus preach, frequent trading limits gains.

Holding your stocks (on average) nets 57.02% more.

And yet, millions choose to day trade.

We all naively believe we’re wiser, wittier, and smarter than we truly are.

It's the overconfidence bias in action.

And day-trading gurus play on this bias. But don't think you're immune.

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Example: Are You Smarter Than a Fifth Grader?

Overconfidence affects us all.

• 65% of Americans believe they are above average in intelligence​²
• In a study of U.S. drivers, 93% rated their driving skills as above-average³
• Even expert marketers are irrationally overconfident⁴

It even explains the success of hit TV shows like this.

Most quiz shows struggle for traction, but not “Are You Smarter Than a 5th Grader?”.

The first season averaged 11.5 million viewers, was nominated for seven daytime Emmy awards and has been adapted for multiple countries.

Why? Because of overconfidence.

We see the title, confidently predict we are more intelligent than a 5th grader, and watch.

It's human nature to be overconfident—and in many scenarios, it benefits us.

But please don't start day trading in 2025.

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Resource: More on overconfidence

Much of what I've learned about overconfidence has come from reading May Contain Lies by Alex Edmans.

I'll try to get him on the pod in the new year.

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That's all for this year. Thanks for reading, folks — Phill

P.S. Big changes are coming in 2025—I'll share all on a future episode of Nudge.