What you thought you knew is hurting your money

Making money decisions is hard work. There’s a lot to think about when trying to build up our savings or invest what little extra cash we have. If that’s not hard enough, what’s more, our brains can play psychological tricks called fallacies, too. In Psychology there is a fallacy called “overconfidence bias” where we start to believe we know more than we actually do. We may think we have special skills to predict which stocks are going to explode or when the market is going to turn. But many times, we end up doing risky projects that don’t work out the way we thought.

Understanding the overconfidence bias

Overconfidence bias is a cognitive bias that can lead investors to overestimate their knowledge, skills, and abilities in financial markets. At its core, the overconfidence bias is a cognitive fallacy individuals overestimate their abilities, knowledge, or skills. In finance, this bias manifests itself when investors believe they have a unique ability to predict market movements, time their buy and sell decisions accurately, and outperform the market consistently. This overestimation often leads to excessive trading, increased risk taking and suboptimal investment results.

This issue affects the Black community more than most. Between dealing with unfair access to money and resources for generations, or not seeing people who look like us in economic leadership, the black community has to overcome obstacles every day. These extra hurdles make it even easier for that trust to go unchecked. Individuals are prone to larger bets trying to guess the market’s next move. But in the end, they are likely to lose more than our hard-earned money.

There is no such thing as a sure thing

As a professional wealth advisor, I can assure you that investing was NEVER a safe bet. No matter how smart one may think their opinions are, the market is always unpredictable. Keeping our confidence in check helps us make wiser choices, which add up to better results in the long run.

It’s easy to attribute these unwise decisions to just stubbornness, but let’s explore another reason why minority communities suffer more from overconfidence when investing—many communities don’t have access to the same resources that others do. If no one taught you the intricacies of the stock market, how can you know what reasonable risks and rewards to take or expect, how would you measure yours? When we don’t have that background, it’s much more likely for people to rely on their gut, follow our social media trends, or listen to advice from friends and family who may be just as clueless and end up with riskier investments from what we understand.

Apart from this drawback, minority communities often feel the added pressure to aggressively play the market. Generations of unfair treatment and limited opportunities have left many communities far behind in wealth. It is understandable why someone would pursue risky investment strategies in hopes of making ends meet or securing a better future for their family. However, this urgent pressure often clouds the judgment even more. It allows overconfidence to take over and gives us false hope in predictions we don’t have the tools or experience to actually make.

From bad to worse

What makes it worse is how many Fraudsters and fraudsters know this vulnerability exists. They see minorities trying desperately to improve their economic situation and use this as an opportunity to take advantage. They will promote get-rich-quick schemes or promote complicated financial products that they profit from even as they leave your savings emptier. These predators fuel the very real economic challenges facing minority communities, deepening the cycle of mistrust and financial frustration.

This is exacerbated by the lack of professionals from these communities who understand the cultural issues and how to communicate with those who need help. Without this representation, minority communities will continue to feel cut off from traditional money systems. We are left to believe that the stock market or the big banks were not designed for us in the first place.

So when we want to improve our money situation, we are more inclined to look outside the mainstream. Things like crypto, NFTs or meme stocks seem more accessible. But because there is still a lack of financial education and understanding, it becomes easier to bet on their highly volatile price movements. We end up trying to time entry and exit points in assets that no one can predict.

Even well-intentioned efforts to achieve financial freedom can fail due to mistrust. Generations of discrimination and injustice have left black communities feeling that traditional wealth building is out of reach. The constant uphill battle destroys hope and confidence over time. Instead of making slow, steady moves of money that pay off, it makes sense to chase unrealistic get-rich fixes based on rumors or viral trends. Feelings of despair leave us vulnerable to risks that we would not be comfortable with if they were adequately explained.

Get well soon

“Minority communities face a complex challenge in terms of market timing and overconfidence bias. By addressing the underlying issues like

• limited access to information with targeted training
• historical economic inequalities with economic growth
• lack of representation with increased financial advantages
• distrust in financial systems with protection and transparency

we can create an environment where people can make better financial decisions. This will help build economic resilience and #intheBlaQ community empowerment.