Question

Investors and managers behave differently in down markets than they do in up markets and individuals tend to _____ their true abilities (under/overestimate).

a) Overestimate
b) Underestimate
c) Ignore
d) Misinterpret

Answer 1

Individuals often overestimate their true abilities in financial markets, with most investors and mutual funds failing to outperform the market average.

Step-by-step explanation:

Individuals tend to overestimate their true abilities in judging financial markets. During up markets when many investors may succeed for a number of years in a row, there is a common trend where investors believe they can outguess the market. However, historical performance data reveals that the majority of financial investors and mutual funds that try to pick stocks to outperform the market often end up with results worse than the market average, indicating a tendency to overestimate one's investment abilities.