Remember Long-Term Capital Management?
These were really smart folks.
Being really smart can lead to a high level of confidence in your decisions. Unfortunately history shows that being really smart can also lead to overconfidence.
But it is not just really smart people who have this problem. If you think that we are not all prone to overconfidence try this little experiment: walk into a room of men and ask how many of them consider themselves “better than average drivers.”
This level of overconfidence turns out to be extremely hazardous to your wealth.
The geniuses (I mean that literarily) at Long-Term Capital had estimated their maximum loss on any single day was unlikely to exceed $35 million.
On Friday, August 21, 1998 they lost $553 MILLION.
They were wrong.
Sometimes the most important question we can ask is: What happens if I am wrong?