Why does it seem that mostly men bet big on crypto, chase meme stocks and gamble on sports? Because that’s the truth.
In a 2024 poll, 61 per cent of global crypto users were men. Men endorsed trading high-risk stocks at a ratio of more than two to one versus women and, in another study, more than three to one for sports betting.
Riskier behaviour by males is well studied − and well observed − and there are strong links to suggest this is partly due to overconfidence. But a new study published earlier this year in the Judgment and Decision Making journal may help us understand a bit more about where some overconfidence comes from.
It turns out confidence can be manufactured through how we process decisions step by step, rather than from genuinely learning more. This has implications for all facets of financial decision making, from choosing the right mortgage options, investment portfolios and insurance, and whether we use a human financial adviser, a robo-adviser, or choose to go it on our own.
In the research, participants were presented with information about a potential business investment in a structured format: They would get one piece of new information at a time. Each item of information was designed to be neutral in that it shouldn’t rationally support or detract from the decision to invest in the company.
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Theory says their confidence in their decisions to invest in this business or not should not change after every piece of new (useless) information was presented. That’s not what happened. Instead, the participants’ confidence in their decisions increased with each new item of information.
To be clear, confidence applies whether they were initially leaning toward investing in the business or seeing it as a bad bet. Whatever their initial position was, it became reinforced through the presentation of new information that was designed to be unhelpful.
The authors of the paper call this the confidence-information-distortion-confidence cycle. Our initial assessment biases how we consume new information. This distorted interpretation of new details then further strengthens our initial position, which then subsequently further biases the consumption of the next new piece of information. This positive-feedback cycle increases certainty but it may not build actual knowledge.
Based on these findings, “Do your own research” may be hollow advice. But it explains a large part of the crypto brotherhood. They consume a lot of information from sources of various credibility including Reddit threads and X accounts, and influencers on YouTube, Instagram and TikTok. The more they consume, regardless of the utility of the information, the more their conviction grows.
Paraphrasing John Oliver, the host of HBO’s Last Week Tonight, cryptocurrencies are “everything we don’t understand about money combined with everything we don’t understand about computers.”
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If online communities provide an echo chamber, it’s easy to see how overconfidence can grow.
Neutral news can be torqued to sound bullish. Dissenters can get drowned out, cast off as non-believers. What remains is a lot of information that may increase confidence without increasing understanding. But while this phenomenon may be exhibited in spades in crypto communities, meme-stock speculators and gamblers shouldn’t presume that they’re immune from it.
The mechanism of creating confidence in a decision through exposure to new information (good information or not) applies across many financial decisions. Whether choosing to go fixed or variable with your mortgage, getting extended warranties, using financial advice or going it alone, your initial leaning may get reinforced without good reason.
The research does suggest a few possible antidotes. Considering information in parallel (all at once) as opposed to serially was shown to reduce the effect. Playing the devil’s advocate with your emerging preference may also serve to offset your bias as you consume new information.
By extension, there may be value in discussing your decision with someone who disagrees with your position. If you both consider new information with opposing preferences, this may help reduce overconfidence.
A good rule of thumb: The more confident you feel about a decision, the more time you should spend trying to prove yourself wrong.
Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.
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