An overconfident individual may perceive an asset to be less risky than it really is because they under-estimate the variance of the return on the asset, but correctly estimate the mean of the return.

Question

Quizplus · Accepted Answer

Overconfidence can lead to an underestimation of the variance (or risk) associated with an asset's returns while still accurately estimating the mean return, leading individuals to perceive the asset as less risky than it actually is.

An Overconfident Individual May Perceive an Asset to Be Less