Broker Check

Conviction, Overconfidence, Speculation, and Hope

September 15, 2022

A recent article I read about the company Robinhood creating a tracking index started me thinking – always a dangerous thing. 

The article discussed creating an index comprised of Robinhood clients' “top conviction” holdings.  This made me laugh out loud! In general, Robinhood investors are considered novice investors.  Is a novice investor buying a “Meme Stock” a conviction or just hope that her/his speculation will work out?

However, my thoughts went to:  How do we decide if we have a high conviction decision, or are we overconfident, speculating or betting on hope?  You see, they are related and intertwined.   I believe that it all comes down to evidence vs. feelings. 

Perhaps you feel good about an “investment”, and you want to own it.  What evidence do you have backing up your feelings?  What is the long-term track record of this investment?  What data do you have to show that this is a good decision?  Or is your decision based on your feelings about the investment and/or raw hope that it will soar?

Of course, we all have a little hope when we invest – which is very appropriate – because we don’t know how things will turn out. 

The reality is It’s a continuum or a spectrum if you will:  on one end of the continuum is high conviction (which is backed up by evidence) and on the other is speculation/hope (which is kind of like gambling).    

The more evidence we have the more likely our decision is closer to the high conviction end of the spectrum.  Think about your financial plan: we run numbers based on your situation and come up with a probability of success.  That gives you great evidence that you’re on the right track.   But when you have less evidence available, it is more likely that you may be overconfident, speculating, and hoping your bet works out.    

If you’d like to talk more about the high conviction to hope continuum, let us know. 

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