Investors rely on both their competence and confidence to make investment decisions appropriate for their preferences and goals. However, too much confidence relative to actual competence can lead to significant problems.

Across many domains, studies have shown that people systematically overestimate their knowledge and abilities. The overconfidence effect, as it is often called, is sometimes dubbed the “mother of all biases” because it not only directly influences our judgment, it also tends to obscure or amplify the influence of other biases.

Overconfidence is crit...