"Time ripens all things; no man is born wise!"
Miguel de Cervantes (1547 - 1616)
Simon Gervais and Terrance Odean in their 1997 "Learning To Be Overconfident" market model survey, they referred to the fact that novice investors do not know why they are successful until enough time passes so that they can gauge how they are doing by the increases or decreases of their portfolios.
Investors take too much credit for their successes and less responsibility for their losses.
Therefore, an overconfident investor tends to become more risky than his ability could ever actually sustain.
Moreover an overconfident person trades too aggressively, therefore increasing trading volume and market volatility.
Overconfidence does not make investors wealthier, but the process of becoming wealthy can make them overconfident!
Having success with such overconfidence is invariably due to luck, not skill, or at least limited skill. And should investors use their overconfidence and the market changes, they can then put themselves into an untenable financial situation when the risky investments possibly fail!
Novice investors are consistently overconfident in their ability to outperform the market, however, most fail to do so!
People usually trade for both cognitive and emotional reasons. They trade because they think they have information when they have nothing but noise, and they trade because trading can bring the joy of pride.
Trading brings pride when decisions turn out well, but it brings regret when decisions do not turn out well.
People usually place different weights on gains and losses and on different ranges of probability. Individuals are much more distressed by prospective losses than they are happy by equivalent gains.
People are twice as likely to feel the pain of a loss than the joy of a gain, and are willing to take more risks to avoid losses than to realize gains. Faced with sure gain, most investors are risk-averse, but faced with sure loss, investors become risk-takers.
Looking at your winning investment decisions objectively is easy to do. Yet, most people don't ever take the time to analyze their mistakes. Post-analysis is one of the best learning tools you have at your disposal.
Don't be afraid to look at your mistakes.
The only real mistake is to continue to be overconfident and make the same mistakes!
I definately recommend you always do a detailed post-analysis of your trades. Note where you made money, and where you lost money. Separate your good, money making decisions from your bad ones.
Go back and look at your good decisions and see what you did correctly. Were you buying stocks at the right time? Was the general market on an upswing?
Then go back and look at your bad decisions. Were you buying stocks with poor earnings? Were those stocks trading at or near new price highs when you purchased them or were you buying them on the way down?
Did you buy the stock right, but just sold it badly?
Was the general market in a correction phase?
When reviewing your loosing decisions, look for patterns or common mistakes you may have been unaware you were making.
Make a note of them by writing down a new rule for yourself to follow like, "I will not do X in the future" or "I will do Y in the future."
Organizing these rules will help you get rid of bad habits you may have acquired, and it will help you accentuate the things you are doing correctly.
Remember, admitting and learning from your past mistakes is the best way to become a smarter, better, and more successful investor!