Posts tagged: self-confidence

An Interesting Study…

One of the prejudices people encounter in the investment process is overconfidence in the quantitative estimates of the market, profitability, probability, etc. The following  is an example of overconfidence which is shown in research conducted by Clark and Statman.

In 1986, the Dow Jones was evaluated under the condition that the dividends paid by companies within the index are not reinvested and thus was set to 40 points. In 1998, the index was at 9000 points. What do you think the value of the Dow Jones would be if companies within the index were reinvested and increased its value? Try to guess at least the range and order values.

Answer: If the dividends paid by the companies of the index would have been reinvested, the Dow Jones would have been 652,230 in 1998! Those who suggested a number close to that do not suffer from overconfidence in regards to investment analysis :)

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