Why Overconfidence Bias Is Dangerous for Doctors and High-Income Professionals

Is this article a waste of time? Because most of the folks with overconfidence bias won’t read it because they’re convinced they don’t have it.

Kidding aside, overconfidence bias is one of the biggest wealth-destroying behavioral finance biases that exist, particularly for doctors and other highly educated professionals.

Let’s look at what overconfidence bias is with some examples and discuss three giveaways that you have it (even if you’re sure you don’t).

What is overconfidence bias, and why do many doctors and other professionals suffer from it?

To put it simply, most doctors and high-income professionals are very smart. Some sources say that folks who go to medical school on average have an IQ of 120, for example. Other professional schools similarly attract individuals with high IQs.

And the smarter you are, the more likely you may feel that your intelligence translates into other areas. 

Giveaway #1: You assume being smart makes you a good investor.

For example, one study of professors found that 94% of them believed they were above average.

Let’s use an example. When you’re a physician playing around in stock options, you’re not competing with the average person on the street.

You’re competing with hedge funds that employ legions of similarly intelligent individuals who spend all their time doing something (in this case, options) that the physician merely does as a hobby.

So, on average, a physician in this case would be considered “dumb money” by the competition (full-time hedge fund traders).

The physician might confuse their periodic success in options (for example, consistent income earned from selling call options) without realizing the risk they’re taking (like when a stock zooms to the moon and the physician loses their entire investment).

Let’s look at another example in the field of short-term real estate.

When the emotional toll of work mixes with overconfidence bias, increased risk can result

Many doctors and other high-income earners I chat with are constantly pitched private investments by a myriad of sources that “don’t track the stock market and offer increased diversification.”

One of the projects I heard about recently was a real estate development in an out-of-the-way area that the developer was pitching to doctors as a solid investment at a 20% projected return.

Consider why the developer is pitching this.

If he takes his deal to a private real estate investor familiar with these types of projects, they might tell him that based on the numbers of all the many real estate deals they’ve financed, the minimum Internal Rate of Return (IRR) for a project he’s proposing should be 30%.

But that would potentially make the deal not work out.

So instead, if he can seek out unsophisticated sources of capital (again, he might be extremely sophisticated in other areas, but not always when it comes to the best investments for doctors), he might be able to get a project financed for far less than what he would have to pay a professional investor.

Clinical medicine and professional services work take a big toll emotionally on families.

Any investment promising large passive income with little to no work that seems like it’s only open to smart people aligns perfectly with people’s pain.

And when you’re investing from a place of burnout and/or pain, you’re likely to make worse investment decisions.

Giveaway #2: You’re more likely to trust “exclusive” investment pitches that feel like they’re meant for someone like you.

Perhaps a better investment would be in yourself! Take a spa weekend, relax, go watch your favorite movie, or cut your hours if you have some savings to fall back on so you can recharge. 

Don’t feel like the only path out is passive income through investments that are hard for even smart people to truly understand.

Admitting you have overconfidence bias means you’re smart and honest with yourself

I think I’m an incredible dancer. Maybe top 5% among men. My wife would disagree. She’d merely say that I’m among the 5% most confident dancers, but that my skill is maybe in the top half, at best.

I know I’m confident in some of my skills. Confidence is not necessarily a bad thing. When it’s dancing, it might be wonderful to have overconfidence bias. After all, someone needs to start the electric slide at weddings.

But if my family’s financial health depends on my belief in my superior dancing skills, I’d be taking a large risk. I’d want to admit that there’s a lot I don’t know about dancing and that I mostly do it because it’s fun.

So, if you have overconfidence bias, you shouldn’t feel ashamed of it. A huge majority of us do.

The problem is when folks won’t admit it, because those folks are the most likely to make a big financial mistake when investing.

Monitor your own decisions, and decide if anything is better to outsource

In time, I realized I was bad at completing tasks like painting rooms. I’d like to think I’m handy around the house, but the truth is I’m not. And my lines are never straight when painting.

For anything that I don’t enjoy, I outsource it. If I like it, I don’t outsource it because it provides entertainment value.

Giveaway #3: You assume you’re doing well, but you don’t actually check.

With your investing, monitor what you actually do over time. Look at your performance vs. a broadly diversified group of U.S. and international stock indexes. See if you’re actually maxing out your backdoor Roths every year or if you forget.

If you’re checking everything off the list, then maybe you are in the top percentiles of investors. But if you consistently miss out on things you know you should’ve done, maybe it’s better to outsource investing tasks to a financial planning firm. SLP Wealth can help keep your overconfidence bias in check if you’d like. 

And if you’ve made it to this point in the article, you’re humble enough to know that having a trusted partner to help course-correct when bias shows up.