Behavioral finance FAQ / Glossary (Underconfidence)

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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental

Underconfidence, underconfident

See overconfidence, delaying
tactics, underreaction

Afraid to be wrong and unable to choose?

People might be under-confident in their possible performance
compared to what they deem could bring a good result.

Effect #1: when it freezes decision

Underconfidence tends to make people freeze decision making,.

Yes it can affect nvestors (even if, you guessed it, the words
"underconfident"
and "investor" are rarely found together,
s investing is to commit money.


Actually there is a rather general decision aversion (see decision /
indecision), or an action aversion, because not only it is an effort
(thus laziness might interfere) to decide or act but also because of
underconfidence.


=> It might be one of the explanations why the status quo bias, or
      the
default solution,  or delaying tactics (see those phrases) are
      often preferred.


Effect #1 :

Delayed economic / financial adjustment

Many investors might procrastinate when they face events
that change the prospects. They delay the needed action (buying, selling...).

 

This has "macro effects" as it translates into an underreaction in
market prices.

Market price adjustments are not instantaneous, they take place gradually
later.

And then overconfidence / overreaction (see those words) can strike
in their turn and lead to excessive prices in the other direction.

This is seen as the main explanation
     of
momentum / trends.

Effect #2: when it leads to mimicry


In some cases, underconfidence makes investor lose their autonomy and
be easily influenced by other people advices without
checking by themselves if those advices are sound and if those people
can be trusted.

Underconfidence seems to be also one of the factors of
herding,
groupthink, peer pressure...

Underconfidence should not be confused
     with pessimism (or optimism)


As under / over confidence is about ones' own abilities, about how far
we trust
or not our judgment. It does not necessarily entail pessimism or
optimism about market prospects.

You can be certain or uncertain that your pessimism or
    
optimism is right or wrong in the present state of the

market. Just choose your combination ;-)

On the other hand, some social mood theorists link market rises and falls
to waves of collective over- / underconfidence, leading to general optimism
or pessimism.

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This page last update: 23/09/15   

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