1.– Illusion of Control bias
Every stock market in the globe is very large. It has a large number of members who frequently buy and sell assets. None of the buyers or sellers has complete control over what happens in the market because there are so many of them and the money is divided among them. The reality is that probabilities form the foundation of the investment markets. Anyone who asserts they can anticipate the result of financial markets with 100 percent accuracy is unquestionably mentally biassed. An illusion of control bias is the name given to this bias. This essay will explain what this bias is and how it impacts a typical investor’s decision-making.
Illusion of Control Bias: What is it?
Investors sometimes have a tendency to think they have some degree of control over the results of the stock market, which is known as illusion of control bias. Some investors don’t think they have total control. Many of them do, however, think they have some sway on the market. Due to the size of the investment markets, where trillions of dollars are traded each week, this is typically not the case. Therefore, it’s possible that an individual investor or even a small to mid-sized organisation is mistaken in thinking that they have control over the market.
It’s possible that some of the investor’s short-term projections will come true.
On the other hand, it can just be a coincidence and not ultimately prove anything. Because they use strategies like limit orders, etc., to purchase and sell shares, investors frequently feel in control of their portfolios. However, because prices fluctuate within a certain range, it frequently only results in pointless buying and selling. The perception of overconfidence is directly related to the delusion of control bias.
How Can Investor Illusion of Control Hurt Them?
The portfolio of investors may suffer significantly from a mistaken sense of control. The following are some examples:
Investors buy penny stocks due to the illusion of control. This is due to the fact that they think that because the company is small, they can use their wealth to buy a sizable interest in it, giving them power over the outcome. However, because to the nature of their respective industries, many of these penny stocks are inherently dangerous. Investors only lose more money as a result of this control illusion!
Investors that have a sense of control frequently think of themselves as industry gurus. As a result, they focus the majority of their portfolio on just one particular area or business. Given that the portfolio is not diversified, here is where the issue first arises. If a negative event occurs, an undiversified portfolio is likely to see significant value swings.
Investors who have a false sense of control miss opportunities when they present themselves. They might have missed advantageous entry and exit points in a specific stock as a result of a delusion of control.
How might this illusion be avoided?
Since we’ve established that this kind of illusion is terrible for investors, it’s important to learn how to identify it and eliminate it from our thinking in order to make wise judgments.
Realizing there is no assurance when it comes to investing is the first and most important step. The return on investment serves as compensation for taking on risk. So, ideally, there wouldn’t be a need for a reward either if there was no danger!
Investors need to be aware that all forms of investment include the use of probability, thus a variety of outcomes are possible but impossible to control. Investors should strive to compile a list of all the variables that might affect a stock’s price in order to fully drill home this concept. They would discover that there are factors at the level of the government, of the competitors, of the macroeconomy, of the market, and so forth. It is nearly hard to govern this complex system because of the large number of different factors at play.