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Guest Thinkers — October 23, 2011

Why Confidence Is Hazardous

Confidence in our own decision making abilities can be amazingly misplaced but remain strong even in the face of evidence that clearly shows the decisions we make are wrong.

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What’s the Latest Development?

Confidence is a feeling, not an objective evaluation of facts. Daniel Kahneman, Princeton psychology professor and Nobel Laureate in economics, learned this first hand when he obtained data on the success rates of individual traders working for financial investments firms on the behalf of very wealthy clients. The firms used the data to calculate year-end bonuses so success was clearly associated with having skill. But Kahneman found that the traders’ success was due almost entirely to luck.

What’s the Big Idea?

Despite Kahneman’s findings, neither traders nor their superiors were shaken in their belief that stock trading is a skill and that some traders are better at it than others. “The confidence we experience as we make a judgment is not a reasoned evaluation of the probability that it is right. Confidence is a feeling, one determined mostly by the coherence of the story and by the ease with which it comes to mind, even when the evidence for the story is sparse and unreliable,” says Kahneman.

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