Analyzing Overconfidence in Wealth Management Decisions

In the context of portfolio management, cognitive errors can significantly influence investor behavior and decision-making processes. Consider the case of a private wealth manager, Sarah, who manages a diversified portfolio for a significant client, Mr. Johnson. Recently, Mr. Johnson experienced substantial gains from his technology sector investments, leading him to believe he possesses exceptional forecasting abilities.

Despite evidence suggesting the market might correct itself, Sarah is concerned that Mr. Johnson's overconfidence stemming from recent successes will lead him to take on riskier investments than is appropriate for his long-term financial goals. Additionally, this overconfidence may manifest in a neglect of due diligence regarding new investment opportunities.

Using Mr. Johnson's case as a reference, analyze the cognitive errors specifically associated with overconfidence and their potential impacts on investment decisions and portfolio management. In your response, discuss specific cognitive errors, their theoretical underpinnings in behavioral finance, how they manifest in actual investment behaviors, and effective strategies that Sarah might use to mitigate these errors while keeping Mr. Johnson's objectives in focus.