Overconfidence refers to a biased way of looking at a situation.

When you
are overconfident, you misjudge your value, opinion, beliefs or abilities and
you have more confidence than you should give the objective parameters of
the situation.
When People Are Overconfident
Overconfidence can cause a person to experience problems because he may
not prepare properly for a situation or may get into a dangerous situation
that he is not equipped to handle.
Some examples of overconfidence include:

A person who thinks his sense of direction is much better than it

actually is. The person could show his overconfidence by going on a long
trip without a map and refusing to ask for directions if he gets lost along
the way.
A person who thinks he is much smarter than he actually is. The
person could show his overconfidence by not studying for his SATs,
ending up with a lower score than he could otherwise have received.
A person who thinks he has a photographic memory and a detailed
understanding of a subject. The person could show his overconfidence by
deciding not to study for a test that he has to take on the subject, thus
doing poorly on the test due to lack of preparation.
A person who thinks he is invaluable to his employer when almost
anyone could actually do his job. The person might show his
overconfidence by coming in late to work because he thinks he is never
going to get fired, or by being overly demanding about getting a raise
and threatening to quit if he doesn't get his way.
A person who thinks his spouse or partner will never ever leave
because he or she loves him too much. The person might try to take
advantage of the spouse or partner due to the overconfidence, thus
driving the spouse away.
A person who thinks he is a great boxer and who challenges someone
who is an amazing fighter to a boxing match. The person who was
overconfident and who was mistaken about his actual boxing abilities
could end up getting badly defeated in the fight as a result of his
overconfidence.
Someone who cannot sing at all but who believes she has a great voice
and decides to try out for American Idol. When she submits her audition
tape, she could end up being laughed at or ridiculed for her terrible voice
because of her overconfidence.
A person who is convinced he is going to get into Harvard and who only
applies to Harvard. In this case, the overconfidence of the person could
result in him not getting into any schools if Harvard rejects him.
A person who has never swam before deciding to try out for the varsity
swimming team without practicing because he is overconfident in his

athletic abilities. His overconfidence could keep him off the team and
make him the butt of many jokes by members of the swimming team.

A presidential candidate who is confident he is going to win and who

doesn't bother to aggressively campaign as a result of his
overconfidence. The overconfidence could cost him the election.
These are all examples of situations where people think that they are more
capable or better equipped for a situation than they actually are.
Representative bias refers to the human bias in us that we often
stereotype certain things with similar characteristics with similar outcome.
For example, whenever we see a beggar, he or she must be poor, thats our
first thought. However, there are cases where some of them live in big
houses! Another example, bad drivers if you see a bad driver, it must be a
lady! So all these are stereotyping!
Anchoring and Adjustment Heuristic
Description
We tend to base estimates and decisions on known anchors or familiar
positions, with an adjustment relative to this start point. We are better
at relative thinking than absolute thinking.
The Primacy Effect and anchoring may combine, for example if a list of
possible sentences given to a jury, they will be anchored by the first option.
Research
Englich and colleagues found that even judges can be influenced by this.
Some judges had to imagine a sentence being greater or less than one
year, whilst others were asked whether the sentence would be more or less
than three years. In later imaginary sentencing, the judges were clearly
influenced by the earlier anchoring.
Example
If asked whether the population of Turkey was greater or less than 30
million, you might give one or other answer. If then asked what you
thought the actual population was, you would very likely guess somewhere
around 30 million, because you have been anchored by the previous
answer.

So What?
Using it
If a negotiation starts with one party suggesting a price or condition, then
the other party is likely to base their counter-offer relative to this given
anchor. So start a good way from your real position (but beware of overdoing this). When giving choices, put the ones you want them to choose at
the beginning.
Defending
If the other person makes the first bid, do not assume that this is close to
their final price.
COGNITIVE DISSONANCE
The next phenomenon is known as cognitive dissonance. The theory of
cognitive dissonance states that when we hold two conflicting beliefs in our
minds, the discomfort caused by this conflict drives us to acquire, or even
invent, new thoughts or beliefs, or even modify current beliefs, in an attempt
to relieve the conflict we feel.
If there is a discrepancy between what one already knows or believes, and
new information that comes to hand, discomfort is felt (dissonance). And in
order to relieve this discomfort, we either invent or modify (or rationalise)
our thoughts to eliminate the dissonance that exists.
OK, now for an example, as this can be confusing without one. Suppose you
are told by a friend who is a car expert that you should buy a Holden
Commodore ahead of a Ford Falcon, as it is the better car in your friends
opinion. However, after having bought the Holden, you come across some
new information that persuasively concludes that the Ford is the better buy.
As a result, we have conflicting cognitions in our head, which causes us
discomfort, and to alleviate this discomfort, what we as humans tend to do
then is to filter out this new information and seek out support for our
preferred belief. Obviously, once the car purchase has been made, the
preferred belief is that your car is the better one.
Clearly, cognitive dissonance is not too dissimilar to confirmation bias. We
tend to seek out information that reinforces our original view, and the basis
of why we do this is the classic human fear the fear of regret. This

phenomenon actually has a name in the world of car and property

purchasing buyers remorse.
So cognitive dissonance initiates a form of self-deception, and this occurs in
the world of investing too. So often, investors buy a stock and upon learning
subsequent information contrary to their original view, they distort,
manipulate or ignore this new information so as to relieve the discomfort
caused by the conflicting views in their heads.
It remains critical as an investor to constantly re-evaluate positions and
views and change them as situations require and new data becomes
available. It is inevitable that investors are going to make mistakes when
forecasting the future. The good investors will minimize the financial damage
done by such errors and the poor investors will fail to minimize the damage
and this can lead to a small number of errors causing large losses.
AVAILABILITY BIAS
The next cognitive illusion is known as availability bias. When confronted
with a decision, humans thinking is influenced by what is personally
relevant, salient, recent or dramatic. Put another way, humans estimate the
probability of an outcome based on how easy that outcome is to imagine.
Consider the following example. In the months after the September 11
terrorist attacks, travellers made the decision that travelling to their
destination by car was a far safer way than by air. In light of the very recent
(at the time), salient and dramatic events of September 11, this decision
seemed an obvious and wise one. The probability of danger when travelling
by air seemed much greater than travelling by car when you think about it,
at that time, it was far easier to imagine something bad happening when
travelling by air.
However, this was the availability heuristic at work. The truth of the matter
was that firstly, air travel had never been safer than in the months following
September 11, on account of the massively increased security. And secondly,
on account of far more people hitting the roads come holiday time, there
were inevitably many more fatal accidents. Upon examination of the
statistics, it was far more dangerous to drive than to fly (US road fatalities in
October-December 2001 were well above average) and yet, the availability
bias humans suffer from made many feel that driving was the smarter
choice this decision-making error cost some people their lives.

We also apply this bias in the world of investing. For instance, availability
bias can result in our paying more attention to stocks covered heavily by the
media, while the availability of information on a stock influences our
tendency to invest in a stock. The [Link] boom of 1999/2000 is a great
example. The availability of information and media coverage of internet
stocks was such that people were more inclined to invest in them than they
would have otherwise been.
Be wary of following the latest market fad simply because of the availability
of information. If you have read it in the newspaper, you may well be
amongst the last in the market to know!!

What is the self-serving bias?

Answer:
The self-serving bias refers to our tendency to take personal credit for
success while blaming outside sources for our failures. Essentially, we tend
to believe that our successes are due to internal traits and talents, while our
failures are caused by variables outside of our control.
If you ace an exam, it's because you studied hard. If you failed, on the other
hand, it's because the teacher didn't explain the subject properly, or the
classroom was too warm, or your roommate kept you up all night before the
exam.
Illusion of control - The tendency for human beings to believe they can
control or at least influence outcomes that they clearly cannot.
CONSERVATISM BIAS
Where people believe prior evidence more than new evidence or information
that has emerged. People were slow to accept the fact that the earth was
round because they tended to believe earlier information that it was flat.

A conservative bias gets across views that support conservative policy: gun
rights, right to life, traditional marriage, national security above all else,
limited government.

This bookbag contains 1000 poker chips. I started out with two such bags,
one containing 700 red and 300 blue chips, the other containing 300 red and
700 blue. [...] Now, you sample, randomly, with replacement after each chip.
In 12 samples, you get 8 reds and 4 blues. [...] what is the probability that
this is the predominantly red bag?
Most subjects chose an answer around .7. The correct answer according to
Bayes' Theorem is closer to .97. Edwards suggested that people updated
beliefs conservatively, in accordance with Bayes' Theorem more slowly. They
updated from .5 incorrectly according to an observed bias in several
experiments