Question

Overconfidence is the tendency for people to underestimate their knowledge, abilities and the precision of their information, or to be overly sanguine of the future and their ability to control it. Based on the research we discussed, do all markets around the world exhibit the same degree of overconfidence? Provide examples for each of the three periods discussed (pre-crisis, during crisis, post-crisis).

Answer 1

Overconfidence varies in global markets during different periods: it is often high pre-crisis, destabilizing during a crisis, and overly cautious or pessimistic post-crisis before stabilizing.

Step-by-step explanation:

The question inquires whether all markets around the world exhibit the same degree of overconfidence across different periods such as pre-crisis, during crisis, and post-crisis. Overconfidence is a well-documented phenomenon and can look different across various markets and time periods. During the pre-crisis period, markets often display high levels of overconfidence, remembering examples of recent success and downplaying potential risks, sometimes due to biases such as the availability heuristic, where decision-making is influenced by the most readily available information. In times of crisis, overconfidence can be destabilizing, as it may lead to a persistent underestimation of the severity of the situation, as seen with initial reactions to the COVID-19 pandemic. Post-crisis, there can be an overcorrection, where the experience of the crisis might cause excessive pessimism or overcautious behavior, influenced by hindsight bias, until markets stabilize and confidence begins to grow optimistically again.