Overconfidence: The Bias That Makes Smart People (Like Doctors) Make Dumb Money Moves

In his excellent book, The Behavior Gap, Carl Richards explains how our own behaviors are often the greatest threat to long-term financial success. He defines the “behavior gap” as the difference between the returns we could earn by simply holding a portfolio of stocks or funds and the lower returns we actually earn.

Why the gap? Because we interfere in our own success. We let our psychology get in the way.

Behavioral finance is a fascinating topic to me, and I’ll be exploring it in a series of posts. Today’s focus: overconfidence.

The Irony of Intelligence

“We’re used to making life-or-death decisions. So how hard can managing money be?”

Many physicians assume that because they’ve succeeded in one high-stakes field, they can easily master another—like personal finance. But intelligence in medicine doesn’t always translate to wisdom in money management. In fact, it can sometimes lead to overconfidence—one of the most dangerous behavioral finance traps.

What Is Overconfidence Bias?

Overconfidence bias is our tendency to overestimate our knowledge, skills, or control over outcomes. In finance, this often shows up as:

• Believing we can consistently beat the market

• Assuming we’ll “figure it out later”

• Discounting professional advice

• Underestimating risk

  
  

This isn’t a character flaw—it’s a deeply human trait. And it’s often magnified in high-achieving professions like medicine.

The Better-Than-Average Effect

In a well-known study, 82% of college students rated themselves as above-average drivers. Statistically, that’s impossible. I wonder what the results would be in a survey of physicians. We are driven, success-oriented people. How many of us would willingly say we’re “average” at what we do?

But the truth is, by definition:

• One-third of us are below average,

• One-third are average,

• And only one-third are above average.

  
  

This tendency to view ourselves more positively than reality suggests is called the better-than-average effect—and it feeds overconfidence. It is at play in investing as well. Believing that we are smarter than the average investor can lead to poor decisions.

I have acknowledged this tendency in myself when reflecting on my own investing history. Before I really understood the relationship between risk and reward with individual investments, there were times when my portfolio was doing great and soundly beating the market and I remember feeling like I was a super-investor, as good as Warren Buffet. After all, my portfolio was creaming Berkshire Hathaway. But then the market crashed and so did my investment returns. Then, I felt like the stupidest investor ever. The reality was that neither was true. It all just reflected the beta (or relative risk) of my investment choices.

Self-Attribution Bias

It is easy and natural to take credit for our successes—even when they may be due to luck—and blame our failures on external factors. That’s self-attribution bias.

In investing, this might look like:

• The market goes up → “I made smart choices.”

• The market goes down → “Just bad luck.”

  
  

This pattern often leads to increased trading after a positive market month. Investors feel validated and start making more moves—believing the outcome was due to their skill. But research consistently shows that higher trading volume correlates with worse returns.

The Illusion of Control

People feel more confident in outcomes when they believe they’re in control—even when that control is an illusion.

For example, studies show people believe they have a higher chance of winning the lottery when they pick the numbers themselves versus receiving a random ticket. In investing, the same thing happens. When asked to compare their own expected portfolio return with the market average, investors consistently predict they’ll outperform—by about 1.5%.

With modern DIY trading platforms, it’s easier than ever to make our own decisions. But just because we can doesn’t mean we should. More choices and more control often lead to worse results, not better.

The Danger of Too Much Information

It seems counterintuitive, but more information doesn’t always lead to better decisions—especially if we don’t know how to interpret it.

The internet is flooded with financial data, opinions, and hot takes from people with varying levels of expertise and often hidden agendas. Without a strong foundation in financial principles, more information can actually mislead us and increase our risk of poor choices.

Why Doctors Are Especially Prone

1. High competence in one domain → Assumed competence in others

   “If I can intubate a crashing patient, I can definitely manage a Roth IRA.”

   You are certainly intelligent enough to be successful with your finances but don't expect it to happen just because you are smart. You didn't become a great doctor overnight. Being good with your money isn't going to just happen either. It takes effort.

   
   

2. Financial late start → Urgency to catch up

   The desire to accelerate wealth-building can tempt physicians into speculative or risky strategies. If you avoid the common trap of lifestyle creep and are disciplined about saving, your high income will allow you to make up for lost time.

   
   

3. DIY mindset + skepticism of financial advisors

   Many doctors avoid financial advisors due to industry mistrust, which is often justified. But a fiduciary advisor can be a trusted ally in your financial success.

   
   

4. Time constraints + false confidence from limited exposure

   Listening to podcasts or reading a book may create the illusion of mastery without true depth. There are great sources of information available that do not cost a lot of money. It does cost time though, and you have to be willing to invest that.

   
   

5. High incomes → false sense of security

   Physicians’ might falsely assume that because they have a high salary, they can be less careful about investing and are willing to take unnecessary risks. Over time, if those risks don't work out in your favor, it ties you more and more to your job and leads to higher and higher risk taking, threatening your future financial freedom.

   
   

How to Counteract Overconfidence

1. Embrace Humility

Acknowledge that financial planning is its own discipline. Being a great doctor doesn’t automatically make you a great investor. Success in personal finance takes effort, education, and often guidance.

2. Use a Written Plan

A written investment strategy keeps your decisions grounded in logic, not emotion. A fiduciary financial advisor can help ensure the plan is diversified, appropriate for your goals, and aligned with your risk tolerance.

3. Automate Decisions

Automate your savings and investments to minimize the temptation to “tinker.”Automatic contributions—especially in retirement accounts—create consistency and take advantage of dollar-cost averaging, which buys more shares when prices dip.

4. Seek Feedback

Whether from a fiduciary advisor or a trusted peer, an outside perspective helps counter blind spots.

Vet your sources carefully. Ask:

• Are they experienced?

• Are they motivated by sales commissions or another hidden agenda?

• Do they have your best interests in mind?

• How well does their situation and experience reflect your own?

5. Study your behavior patterns

Reflect on past financial decisions—were they truly skill-based or lucky? What would you have done differently with the 20/20 lens of hindsight? Although past performance does not predict future outcomes, there is a lot of value in looking back at your decisions, analyzing your thinking at the time, and discovering how it all turned out. 

If you are honest with yourself, hopefully you can learn from your mistakes.  That takes effort, though, because frequently, our financial errors—our behavior gap—is related to very natural human tendencies, which unless recognized and controlled for will likely be repeated.  

Closing: Smart Enough to Know Better

Overconfidence isn’t foolish—it’s natural. But left unchecked, it can sabotage even the smartest investors. Being a physician takes discipline, humility, and a willingness to learn. The same is true of successful financial planning.

It’s not about knowing everything—it’s about knowing when to slow down, simplify, automate, reflect, and ask for help.

If you are interested in connecting with a fiduciary financial advisor who understands what it is like to be a doctor firsthand, I'd love to hear from you. You can contact me via email at bryan@targetedwealthsolutions.com