Building Wealth: Just Enough Confidence Required

Confidence 2

If you have ever worked for a leader who lacks confidence, you know how painful your daily slog can be. A leader’s dearth of confidence can suppress opportunities of superstar employees or lead to an inability to secure resources, including pay, promotions, and bonuses, for team members. Great leaders balance confidence with realism and perspective, and have enough self-esteem and self-efficacy to delegate to and develop team members and work for the good of the organization. There is science behind this concept, too. Belief in one’s skills and abilities and in one’s self-worth as a person are two components of core self-evaluations and are related job performance (for example, see Dr, Timothy Judge’s research on core self-evaluations).

You can have too much of a good thing, though. Overconfident leaders can be equally frustrating: ignoring organizational and environmental factors that could spell disaster for their team or company, not delegating tasks effectively,  and not seeing weaknesses in their own abilities.

In the investing arena, overconfidence can be quite detrimental. Investing overconfidence has been shown to be related to unsuccessful decisions regarding one’s investments, including frequent trading, overestimates in a security’s value, and poor selection of mutual funds. In fact, in one large-scale study regarding investor overconfidence, the authors conclude:

We believe that there is a simple and powerful explanation for the high levels of counterproductive trading in financial markets: overconfidence.* 

In the prediction of net worth, we see the importance of what we call Effective Confidence, that is, confidence with a touch of humility/realism about one’s abilities and skills as they relate to investing and managing finances in general. In one of our latest studies, we again found a consistent pattern of behaviors and life experiences that demonstrate a moderate level of confidence about one’s ability and skills related to investing. We find that Effective Confidence is related to net worth, regardless of one’s age, income, and percentage of inherited wealth.

So, in developing skills in financial management and investing (or in selecting leaders, as in the example above), the aim should not be for extreme levels of confidence, but confidence that is balanced with a realistic perspective about one’s competencies.

 

*Barber, B. M., & Odean, T. (2001). Boys will be boys: Gender, overconfidence, and common stock investment. Quarterly journal of Economics, 261-292.

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