Overconfidence and Anchoring

Overconfidence

In trading and investing, I have learned that the greatest danger is not only the volatility of the markets, sudden news, or weak economic data, but often myself and the tendency to believe I know more than I actually do. This is what we call overconfidence, and it has quietly caused more financial losses than most people realize. I used to think that a few winning trades meant I had it all figured out, but that belief quickly led me into mistakes that cost more than money. It cost me clarity and discipline. Confidence is important because it gives us the courage to take risks, trust our instincts, and act decisively, but when it turns into overconfidence it becomes dangerous. It blinds us, makes us ignore reality, and pushes us to act on belief instead of truth.

The Psychology Behind Overconfidence

Overconfidence is deeply rooted in human psychology. We like to feel in control. We like to believe we are smarter than average. And we hate being wrong. Studies have shown that most people rate themselves above average in areas like driving, intelligence, and decision-making. Statistically, this is impossible, yet we cling to these beliefs. In trading, this illusion of skill becomes even more dangerous because short-term success can reinforce false confidence. We confuse luck with skill, and that confusion becomes costly.

Let me share a personal story.

In my first year of active trading, I was coming off a winning streak. For several months, my trades were hitting profit targets consistently. I had developed a system that seemed to work well, and my confidence was soaring. I started to believe I had figured out the market. I ignored risk management rules that had once kept me grounded, and I began increasing my position sizes.

Then, it happened.

My client from Malaysia and I were trading gold back in 2013. We entered a trade based on a setup I had seen work before. It started going against us. Instead of exiting with a small loss, I held on, thinking, I know this pattern. It will reverse. It did not. We doubled down, convinced I was right. The loss that followed was one of the largest of my trading career. That moment humbled me. It taught me that the market does not care how confident you are. What matters is discipline, objectivity, and respect for risk.

Overconfidence is something we will face many times in our trading journey. It is that feeling when we think we know more than we actually do or when we believe we have more control than we really have. For me, it showed up in simple but costly ways and that is by trading too often, ignoring advice, or expecting results that were not realistic. I used to think I could call the market perfectly and always choose the right trade. Of course, reality proved me wrong more than once. The truth is, overconfidence does not make you stronger. It blinds you. What really makes you grow is humility, patience, and the willingness to learn from mistakes. Once I embraced that, I stopped chasing the illusion of perfection and started focusing on progress. That shift not only made me a better trader but also a better decision maker in life.

Forms of Overconfidence in Trading

Overconfidence in trading can take different forms, and recognizing these patterns is the first step to managing them. Sometimes it shows up as overestimation, when you believe you know more than you actually do and feel certain about the market’s direction without enough data. Other times it appears as overplacement, when you assume you are better than other traders or that your strategy is superior despite evidence to the contrary. Then there is overprecision, when you become too certain about your forecasts and leave no room for uncertainty or alternative outcomes. The cost of overconfidence is often heavy. Traders who fall into this trap tend to trade too frequently, ignore diversification, take on excessive risks, hold losing positions for too long, and dismiss warning signs that do not fit their views. Studies even show that frequent traders usually earn lower returns than those who trade less. The reason is clear: confidence without discipline does not build success, it leads to poor decisions.

The good news is that overconfidence, like any bias, can be managed with awareness and intentional practice. One way is by keeping a trading journal where you write down the reason for every trade, your confidence level, and the outcome so you can spot patterns in your thinking. Another is by relying on data and tested strategies rather than emotion or gut feelings. Sticking to risk management rules is also essential, such as setting stop losses and position sizes in advance and following them without exception. It also helps to welcome feedback and surround yourself with people who challenge your views, as this can reveal blind spots you might otherwise miss. Above all, practicing humility is key, because the market is bigger than any one person and will not reward arrogance. With this mindset, you give yourself the chance to last longer and grow stronger as a trader.

Personal Learnings

You might wonder why overconfidence persists even when it often leads to harm, and the answer is simple: confidence feels good. It gives us a sense of control in a world that is full of uncertainty, and sometimes those overconfident decisions actually work out, which reinforces the belief that we were right. But lasting success in trading is not about always being right, it is about managing risk, adapting to change, and making choices based on logic rather than ego. Overconfidence is not strength; more often it is a sign of inexperience or unchecked emotion. The best traders are not those who always feel certain but those who accept that markets are unpredictable and still manage to make disciplined and thoughtful decisions. Self-awareness, humility, and discipline are the antidotes, because no one can ever predict the market with certainty. So whenever you feel completely sure about a trade, pause and ask yourself if your confidence comes from solid preparation or from the desire to be right. Knowing that difference is what sets apart those who last in this game. In the end, the most powerful trader is not the one who thinks he knows it all, but the one who never stops learning.

Anchoring: How First Impressions Shape Our Financial Decisions

The other day, I walked into a store and saw a shirt with a price tag of 2,500 pesos. My first thought was, “Wow, that’s pricey.” But then I spotted another shirt hanging nearby for 1,200 pesos. Compared to the first one, it suddenly felt like a good deal. Without even realizing it, my mind had already set that 2,500-peso shirt as the standard for what’s “expensive.” That’s anchoring in action. The first number I saw became my reference point, and it shaped how I judged the second price. This same bias shows up everywhere and not just in shopping, but in trading, investing, and business decisions. Instead of weighing things purely on logic or real value, we often rely too heavily on the first piece of information we encounter.

What is anchoring?

Anchoring is a psychological phenomenon where people rely too much on the first piece of information they receive when making a decision. This first number, idea, or fact becomes the mental starting point, and even when additional information is provided, we tend to adjust too little from the anchor. The problem is that the anchor may have nothing to do with the actual value or situation. But once it is in your mind, it influences how you interpret everything that comes after. This concept was first introduced by psychologists Amos Tversky and Daniel Kahneman, who demonstrated in their research how even random or unrelated numbers could affect people’s judgments and estimates.

I remember one particular trade that taught me this lesson in a painful but valuable way. I had been watching Dow Inc. stock that recently fell from $57 to around $39. My first thought was, “This is a discount. It was just $39, so buying at $39 must be a good deal.” That $57 mark stuck in my head. It became my anchor. Every time the stock moved, I kept measuring its value based on that original price. But I did not stop to ask the important questions. Why did the stock fall? Was it still worth $57? Was $39 actually a fair price, or even too high? I bought the stock based on the anchor and held on to it even as it dropped further. My belief in its former price blinded me from seeing the new reality. Eventually, I exited with a loss, not because of bad technical analysis, but because I let a meaningless number shape my judgment.

Anchoring in the Financial World

Anchoring shows up everywhere in finance and it influences how we judge stocks, homes, salaries, and even cryptocurrencies. For example, many investors look at a stock’s previous high and assume that is its true value. If a stock once traded at 150 pesos and is now at 100, they may immediately think it is undervalued without checking the fundamentals. The old price becomes their anchor. The same thing happens with earnings forecasts. If a company predicts twenty percent growth, analysts and investors often stick to that number even when new data suggests otherwise, adjusting their expectations only slightly instead of reassessing completely. Anchoring also plays out in negotiations, where the first offer sets the frame for the entire discussion, no matter how unrealistic it may be.

This happens because our brains are naturally wired to use shortcuts when making decisions. These shortcuts, called heuristics, save time and effort, but they also make us prone to error. When we encounter a number or an idea, we tend to latch onto it as a starting point, and even when new information arrives, our adjustments are often too small. Anchoring also gives us comfort in the face of uncertainty. It creates a sense of stability, even if that stability is an illusion. In reality, anchors make us feel more in control, but they often prevent us from thinking objectively and making decisions based on the full picture.

Application of Anchoring in Trading: The Hidden Cost of Anchoring

In trading, anchoring often tricks us into decisions that feel right but end up costing us. For example, if a stock once traded at ₱150 and is now at ₱80, many traders assume it’s a bargain without checking if the company’s fundamentals actually support that value. Others might hold onto a losing stock, convinced it will “return” to its old price, even though nothing in the market suggests a recovery. Anchoring can also make us sell too early because we lock onto a certain profit target or ignore new data that doesn’t fit the first price or forecast we heard. Over time, this bias keeps us stuck in the past instead of reacting to what’s happening now.

The good news is anchoring can be managed. Start by questioning the anchor: ask yourself if that price or forecast is based on current facts, or just old numbers. Try looking at a trade as if you had no history with it. Would you still buy or hold it today? Use multiple sources like charts, news, and opinions instead of relying on just one reference point. Focus on real metrics like earnings, industry trends, or debt levels rather than what a stock “used to be worth.” And most importantly, remind yourself that past highs or previous offers don’t dictate real value. Value is created in the present, and the market rewards those who see it clearly.

Final Thoughts

Anchoring is not just something that affects traders or investors. It shows up in everyday life in ways we often overlook. Maybe you have compared prices and chosen a product simply because it seemed cheaper than the first one you saw, or maybe you judged someone based on your first impression without giving them a fair chance. Perhaps you accepted the first quote for a service without looking for better options. I have made those same mistakes, too. We all have. The truth is, anchoring quietly shapes our decisions by making us cling to the first number, idea, or impression we encounter even when it no longer makes sense. But once you start noticing it, you can begin to let go of outdated beliefs and see things for what they truly are. Whether you are trading, making a big life decision, or just choosing what to buy, remember to pause and ask yourself: Is this still relevant, or am I holding on just because it was first? Letting go of anchors gives you the clarity to move forward with better judgment and a stronger sense of control.

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