Psychology and Risk Management
• What to expect
• Risks
• Position sizing
• illusion of control
• Accepting critisism
• Paralyzed by fear
• Loss is a feedback, not a failure
• The flexible trader
• Focusing on the positive
• Short straddle
• The dynamics of greed
• The herd mentality
• Notes
False Consensus Effects
Let’s say you chose to buy more bpcl shares. How many additional investors would you expect to support your choice? When faced with such a situation, people have a tendency to overestimate the number of people who will take the same course of action. The False effects in stock market “false consensus effect” is the name given to this bias in decision-making.
Social psychologists have shown that people consistently overestimate the number of people who will agree with them, regardless of the choice they are asked to make, the significance of the issue, or the importance of the issue. We all have a tendency to think that our actions are generally acceptable, typical, and consistent with what our coworkers and peers would do in a comparable circumstance.
We all have a tendency to think that our actions are generally acceptable, typical, and consistent with what our coworkers and peers would do in a comparable circumstance. We use our choices as a “anchor” and assess what other people might do in light of them. Being overconfident may be a result of this bias in judgement. Once we make a choice, we often believe that we are right and that other people would concur with us. Though they might not.
The process by which people choose their course of action is one theory for the false consensus effect. People attempt to put together evidence to reach a conclusion while deciding on a position. They eventually group all the evidence that favours one course of action over another, dismissing contradicting evidence. Once a decision has been made, the supporting information is “accessible” in memory and is simple to recall. People still have these numerous pieces of confirming data in mind, are able to recall them with ease, and assume that others will behave as they do based on the information they remember when asked to estimate the number of people who would reach a similar conclusion. People tend to make assumptions about what other people will do rather than relying on accurate facts.
However, there is some evidence to suggest that one’s propensity to arrive at a misleading consensus estimate relies on how confident they are in their choice. For instance, Drs. Gary Marks and Norman Miller altered the degree to which participants felt certain about a choice they had made. The estimation of the number of people who would adopt the same course of action depends on how confident one is in their choice. Therefore, the more certain we are about a choice, the more we think others will act in a similar manner. Our sense of overconfidence is further increased by these inaccurate consensus assessments.
How may the False effects in stock market, and false consensus effect be overcome? It is usually advisable to approach all of your choices with scepticism. Think about how people tend to make decisions based on information they can recall and seek for information that confirms it. It takes all of our mental effort to put information together that supports our decision together, but we must also search for information that contradicts our judgement because making a decision is so difficult. Therefore, take a step back after gathering your data and before making a decision and ask yourself, “Am I succumbing to a decision-making bias?” Was my evaluation of the facts objective or was it an effort to support an already held belief?
Always keep in mind that several typical decision-making biases, such as the false consensus False effects in stock market, can affect your perceptions.