162 THE CREATIVE INVESTMENT TEAM
man behind the curtain is a fake. They are pros at it, and in this
respect they are great warriors, fighting through sham and illusion
to unearth the financial truth, confidently wielding analytical
swords.
This combination of personality type and training can be deadly,
though.
All strengths have corresponding weaknesses, and the down-
side of the investor’s natural skepticism is that it kills creativity.
These samurai rarely put their swords down long enough to be
playfully innocent. Being competent is a deep core value to many
investment pros, so the idea of dropping their certainty and assum-
ing nothing rubs all their fur and feathers the wrong way. The mere
suggestion of exposing their ignorance is about as much fun as
optical surgery with a butter knife.
The behavioral finance folks have researched this phenomenon
and named it. They call it “overconfidence.” (For once, psycholo-
gists came up with a name that Ockham would have loved.) The
evidence for overconfidence is the sort that appeals to the strength
of investors: analytic reasoning. Investors will listen to and quite
possibly accept this sort of evidence as a reason to change. (We all
know that the only people who like change are panhandlers and
wet babies.) One of the leading figures in the field of behavioral
finance, Amos Tversky, said that investors “are generally overcon-
fident. They acquire too much confidence from the information
that is available to them, and they think they are right much more
often than they actually are” (Behavioral Finance and Decision
Theory in Investment Management, AIMR Publications 1995). This
sort of overconfidence results in famous bloopers like the ones listed
earlier (“heavier-than-air flying machines are impossible,” etc.).
These statements remind us that “the true obstacle to progress is
not ignorance but the illusion of knowledge,” to quote Daniel
Boorstin of the Library of Congress. If you don’t believe that you
are overconfident, try the quiz at the end of this chapter.
Evidence for overconfident behavior comes from many fields.14-25 ware 162 1/19/01, 1:15 PM