Definition
Conviction, timing skill, or insight are assumed superior to what historical hit rates justify.
Example
A trader becomes convinced they can "feel" when a currency pair is about to reverse and begins increasing position size despite their historical hit-rate showing no edge. Losses are attributed to bad luck rather than a lack of signal quality, reinforcing the cycle.
Cognitive Driver
Confidence scales faster than competence. The mind inflates the perceived accuracy of its judgments and selectively remembers wins. Random success is misinterpreted as confirmation of skill, while failures become externalised. This breaks calibration between belief and actual forecasting ability.
Market Expression
Aggressive sizing without evidence of an edge. Over-trading. Dismissal of risk controls. Extrapolation from small sample wins. Elevated conviction unsupported by data. A tendency to override signals, frameworks, or systematic models based on instinct.
Trigger Conditions
- Short bursts of good performance
- Environments with high headline uncertainty
- Markets where narratives reward strong conviction
- Complex instruments that create an illusion of mastery
- Peer comparison or competitive framing
Diagnostic Markers
- Sizing decisions exceed documented edge
- Forecast confidence remains high regardless of recent accuracy
- Losses rationalised as anomalies or "unfair" market behaviour
- Increased trade frequency during periods of volatility
- Disregard for process in favour of intuition or improvisation
Cost Profile
- Volatility drag from frequent trading
- Sharp drawdowns due to mis-sizing
- Erosion of systematic discipline
- Excessive turnover and transaction cost leakage
- P&L patterns dominated by avoidable large losses
Differentiation From Adjacent Biases
- Not illusion of control: overconfidence inflates perceived skill; illusion of control inflates perceived influence.
- Not confirmation bias: overconfidence concerns self-assessment; confirmation concerns evidence-selection.
- Not recency: overconfidence persists independent of short-term performance bursts.
Corrective Lens
Force calibration by comparing conviction levels to historical accuracy. Require all high-conviction trades to document the empirical edge justifying size. Use probabilistic forecasting and Brier scoring to reconnect self-assessment with real-world outcomes and prevent intuition from dominating position construction.