Explain the concept of the illusion of skill and its significance in economic decision-making.

Explain the concept of the illusion of skill and its significance in economic decision-making.

The illusion of skill refers to the tendency of individuals to overestimate their own abilities and believe that they have more control over outcomes than they actually do. In economic decision-making, this bias can lead individuals to make overly optimistic and risky choices based on their perceived skills or expertise. This can result in poor investment decisions, excessive trading, and ultimately financial losses. The significance of the illusion of skill in economic decision-making is that it can contribute to market inefficiencies and instability, as individuals' overconfidence can lead to misallocation of resources and increased volatility.