Overcoming home- and overconfidence bias: an effective guideline for private investors based on meta-analysis

Abstract

Private investors’ underperformance compared to institutional investors is attributed to a combination of factors, including home bias and overconfidence bias. Home bias refers to the tendency of private investors to overinvest in their domestic markets, which can result in missed opportunities for diversification and exposure to international markets. Institutional investors are less likely to exhibit this bias as they have the resources and expertise to invest globally. Overconfidence bias, on the other hand, refers to private investors’ tendency to believe they have an informational advantage and can outperform the market. This can lead to excessive trading and suboptimal investment decisions. Institutional investors, with their experience and disciplined investment processes, are less likely to fall prey to overconfidence bias. Together, these biases contribute to the underperformance of private investors compared to institutional investors. The following abstract presents four strategies to overcome home- and overconfidence bias derived from the insights of this literature reviewed meta analysis.