This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 9 April 2016.
As I write this, tonight’s TV fare is another reality television cooking show. It’s the usual format – a bunch of ordinary Australians from across the country, who are handy in the kitchen and dream of making it big in the cooking or restaurant industry. The usual approach to chef stardom, of getting a job as a lowly-paid pot-washer and working your way to head chef over the next thirty years, has made way for the glory of instant celebrity and a published cookbook. Unfortunately it seems as though the competitors each successive year haven’t noticed a nasty trend in reality television – if the first winner of the show, in series one, made it to D-grade celebrity-dom, the current crop of winners are going to struggle to make it out of Z-grade at best. For example, who can remember the winners of Masterchef or Australian Idol from six years ago?
Watching the show, what struck me was the confidence that every contestant had in their own abilities. No shrinking violets here, it’s all ‘We’re gonna smash the competition’ or ‘So and So may be good, but we’ve got the skills to take it home’. Perhaps it’s the editing or maybe it’s only because of encouragement by the producers, but it’s as though each contestant truly believes they are blessed with exceptional cooking skills. The tendency to be over-confident in one’s abilities is not restricted to reality television cooking shows however, unfortunately most of us are prone to over-confidence. One study in the United States found that 88% of Americans thought that they were better than average drivers, clearly an impossible position. In proof that over-confidence was not based on nationality, the same study found that 77% of drivers in Sweden similarly believed they were better than average drivers. Similar studies have found that in almost every endeavour, we tend to think that we are better than we really are.
The perils of over-confidence when it comes to investing are many. Overconfidence often manifests itself in excessive trading – if you truly believe you know what you are doing, you’re likely to (erroneously) want to keep on doing it. Buy, sell, buy, sell and generally lower your overall long term returns. The illusion of control and desire to master the market are also traits born from over-confidence. Again, such an approach is unlikely to result in the long term returns you expect (or hope) to make. Avoiding the trap of overconfidence is difficult, generally experience is the best antidote. But when you’re a good home cook on the fast-track to culinary stardom, taking time to gain experience is as undesirable as mistaking the salt for the sugar in the crème brulee.