Illusion of Memory
Memory distorts confidence. People view memories as exact copies of the original experience. Yet, memory, psychologists conclude, is cobbled together from fragments of information similar to how paleontologists decipher the appearance of a dinosaur from pieces of bone.18
If people are unaware of the reconstructive nature of memory and perception and cannot distinguish between assertions and inferences, they will not critically evaluate their inferred knowledge. In general, any process that changes the contents of memory unbeknownst to people will keep them from asking relevant validity questions and may lead to overconfidence.19
Memory is clearly influenced by news media. In one experiment, scholars asked people to determine the most frequent cause of death in the United States. Lethal events ranged from smallpox to syphilis to car accidents, heart disease and cancer, fire, and all other manner of woes. They found that many people chose deaths that were caused by “dramatic, well-publicized events” and underestimated “quiet killers.”20 Academic research convincingly demonstrates that people who think they know something about investing are the most susceptible to failure. They fall for scams because they think they know more than they actually do.
A NASD Investor Education Foundation study conducted in 2006 found that investment fraud victims were more likely than others to rely on their own experience and knowledge to make financial decisions. The study concluded ...