Understanding Overconfidence in Investment Decisions

Behavioral finance explores the psychological influences on investors' decision-making processes. One common cognitive error that investors may exhibit is overconfidence. Overconfidence can lead to an underestimation of risks and an overestimation of one's own knowledge and abilities. This often results in excessive trading and poor investment outcomes.

Imagine you are a financial advisor discussing this concept with a client. Explain what overconfidence is, how it manifests in investment decisions, and suggest strategies to mitigate its effects in their investment strategy.