OPINION: Researchers found two kinds of memory biases: distortion and selective forgetting.
The crash in bitcoin and other cryptocurrencies Tuesday was a stark reminder of the dangers of overconfidence.
While there is a lot of academic research documenting overconfidence, pinpointing which types of investors are more overconfident , and exploring the devastating consequences overconfidence can have on individuals and society, much less attention has been paid to why it is so prevalent. The link between traders’ faulty memories and overconfidence has been suspected for some time. Erik Davidson, a former chief investment officer at Wells Fargo, once said: “Much like our human predisposition toward nostalgia about the past, where we only remember the good times and gloss over the bad, investors likewise tend to take a nostalgic view of their past winners but forget about their past losing investments.
Potential remedy Our research also identified a possible remedy, a simple intervention that mitigates memory bias and thereby reduces overconfidence. In this study, half the investors simply looked up their actual returns at the beginning of the experiment instead of toward the end, providing no opportunity for biased memory.
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