The tendency to believe one has more influence over events than is objectively possible — leading to overtrading and excessive confidence in active portfolio management.
Deeper Explanation
Active investors face a particular version of the illusion of control: the feeling that more research, more portfolio adjustments, and more active management produce better outcomes. For many, the opposite is true. Excessive trading generates transaction costs and taxes; more information sometimes produces overconfidence rather than better calibration. The evidence is striking: after fees and taxes, most active managers underperform the index. The illusion of control is partly why: the sense of being actively engaged and informed creates confidence that actual performance data does not support.
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