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Psychology

Overconfidence bias

By Jarosław Wasiński • Published: • Updated:
Overstating the accuracy of one’s assessments or degree of control relative to evidence. It can influence risk, information selection and trust in a model. Confidence should be evaluated against defined events and sample uncertainty, including forecast calibration. A winning run alone establishes neither a larger edge nor a justification for new sizing.
Example. Before 20 events, you assign each an 80% probability of a clearly defined success. Eight succeed, a 40% observed frequency in that group. This is a notable discrepancy in a small sample, not a final calibration diagnosis. A representative sample, uncertainty and a stable event definition are still needed.

Confidence and position size

Overconfidence means overstating knowledge or control relative to available evidence. It can encourage risk increases after wins, ignoring opposing scenarios or overstating model precision. A volume increase alone does not establish an error when it follows a previously evaluated sizing rule. Judge the reason and evidence rather than the action in isolation.

Calibration needs a defined target

Record a probability before observing the result and define the event, such as reaching +1R before −1R within a stated time. Compare forecast groups with outcomes instead of recording only “very confident”. The Brier score averages squared binary forecast errors; alone it separates neither every calibration component nor establishes profitability.

Outcomes and process

A winning run can contain information, but its meaning depends on dependence, sample size and changing conditions. Maintain limits and scheduled review instead of raising risk solely from a feeling of control. A compliant loss and a profitable breach must remain distinct when evaluating decisions and revising the policy.

FAQ

Is high confidence always an error?
No. The issue is whether it is justified and calibrated to defined events.
Does a good Brier score guarantee profit?
No. Payoffs, costs, execution and exposure rules also determine results.

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Jarosław Wasiński

Editor-in-chief, ForexMechanics.com • Macro & FX analyst

Independent analyst and practitioner with over 20 years of experience in financial markets. Actively involved in Forex since 2007, with a focus on fundamental analysis, OTC market structure, and disciplined capital risk management.

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