My question is related to the Reading 54 (Efficicient Capital Market), LOS d. (Define behavioral finance and describe overconfidence bias, confirmation bias, and escalation bias.). What is the difference between escalation bias and overconfidence bias? Thanks
Escalation bias tends to involve additional actions. For example one might buy additional shares once a stock is down, to “average down” on the price. People acting on escalation bias tends to ignore the concept of sunk cost. Overconfidence bias doesn’t necessarily involve additional actions. It is simply the tendency for people to believe they’re right more often than what the evidence can justify, and to put more faith and emphasis in good news over bad news. It was confusing the first time I came across this too.
Really helpful! Thanks.