Overconfidence Bias as an Explanation of Economic Behaviours

Overconfidence is a cognitive bias that primarily consists of three components: overestimation, overplacement, and overprecision. Overconfidence bias has a wide range of applications in real-life scenarios like medical, educational, and financial fields. This paper focuses on the impact of overconfidence bias in two economic areas: the stock market and entrepreneurship. In the stock market, overconfident investors can lead to mispricing and overtrading. In entrepreneurship, overconfidence can lead to excess entry into the market and delayed exit from the market. Lastly, the paper discusses ways in which individuals can minimize overconfidence during stock market investing and entrepreneurship, including using objective data and information, seeking relevant professional education, and obtaining advice from diverse perspectives. Based on discussing the existence of overconfidence bias and its related coping strategies, this paper highlights the prevalence of the effects of overconfidence bias and the need to pay more attention to overconfidence bias, not only for stock investors and entrepreneurs.