Confidence is not always a good thing

August 2018 | Justin Hooper 

Being confident is regarded as an admirable trait, but there are times when confidence can be bad for achieving outcomes.

One of my weekend pastimes in winter is watching Shute Shield rugby on Saturday afternoons. There’s so much about sport which I find fascinating, and rugby has the added element of physical contact and many varied contests for the ball. This last weekend was particularly interesting with the beginning of the finals series adding pressure, and high winds making the conditions difficult.

It’s at these times that confidence or a lack of it at critical moments is apparent. Handling pressure and managing the situation is often when champions emerge.

Confidence is good

Confidence is often the critical ingredient in success. I can’t imagine ever seeing someone who has been successful, who isn’t confident. Everyone would accept that success and confidence are synonymous. It often comes from experience, but some people are able to muster it when needed. Others seem to doubt themselves unnecessarily. There’s an old saying; “whether you believe you can or you can’t, you’re right.”

Confidence is most needed when most people have doubt. As another saying goes, “when the going gets tough, the tough get going”. That’s confidence. Being confident provides the foundation to fulfil ones abilities.

People who lack it doubt that they can deliver. Often they have an unrealistic view of their abilities and that unrealistic view usually results in them being unable to deliver.

Overconfidence is bad

But can one be overconfident? Is too much confidence a bad thing?

Some of the greatest tragedies in history have been caused by too much confidence. The Titanic is a classic example – but not the only one. What about George Bush standing on the aircraft carrier declaring the end of major conflict with a big sign, ‘Mission Accomplished’, or the loss of the two space shuttles, the Deepwater Horizon oil spill, and possibly even this latest tragedy in Genoa.

It’s the underlying cause of many daily errors and sport is again a great leveller. Upsets are often caused by an overconfident and complacent competitor being exposed.

Confidence is not good for investing, but neither is fear

Confidence is not a good ingredient when it comes to investing. As Daniel Kahneman, a Nobel Laureate in behavioural economics said, “Overconfidence is the mother of all psychological biases.”

Participants in investment markets have come up with various theories from the beginning. This will never change as investors seek the “holy grail”. The relationship between bond and dividend yields, the value premium, increasing dividend stocks and using alternatives, are just some.

Whether it’s because the other market participants catch up and therefore eliminate the additional return, or the theory just had a lucky period that has run out, most cease to deliver at least for a time. High-frequency traders are at the forefront of innovative trading strategies and are very aware that a strategy has a limited life.

The opposite of confidence is fear, and fear is definitely not good for investing. Fear results in misunderstanding and overstating risk. Investors with fear focus on cost rather than value. They confuse perceived risk with actual risk, and their fears are often confirmed because they become more bold at exactly the wrong times.

The Goldilocks zone

Optimism leads to confidence but there can be too much confidence. Kahneman talks about the “Goldilocks zone of confidence”, which is where rational beliefs meet reality.

This is the zone in which logic and common sense meet beliefs and confidence. It’s a place between overconfidence and fear, and to tread this path requires an open mind, a strong element of self-examination, and a lack of ego. It requires an ability to accept being wrong and change the approach.

It will be interesting to see how the various rugby teams go this weekend. None of the four remaining teams have been dominant, so the right level of confidence is likely to be the difference.