Illusion of Control Bias
Abdur Raheem Adnan Arshad
M. Usama Asif
063 077 076 061
in fact. they cannot.Bias Description
Bias Name: Illusion of Control
Bias Type: Cognitive Illusion of control bias describes the tendency of human
beings to believe that they can control or at least influence out-comes when.
The effect was named by psychologist Ellen Langer and has been replicated in many different contexts. It is thought to influence gambling behavior and belief in the paranormal. the illusion of control is one of the positive illusions. Along with illusory superiority and optimism bias.
. Illusion of control is associated with under-estimation of risk.
22) “The illusion of control—the belief that we can influence the outcome of uncontrollable events" Montier (2010." Montier (2007) The illusion of control refers to people's belief that they have influence over the outcome of uncontrollable events." (Montier 2007. p. p." (wikipedia) "The illusion of control refers to people's belief that they have influence over the outcome of uncontrollable events.Different Definitions
illusion of control is the tendency for human beings to believe they can control or at least influence outcomes which they clearly cannot. 133)
The illusion is strengthened by stressful and competitive situations. while feedback that emphasizes failure can decrease or reverse the effect.[
. and in
situations where the person knows the desired outcome. Feedback that emphasizes success rather than failure can increase the effect. including financial trading.Explanation
The illusion is more common in familiar situations. The illusion is weaker for depressed individuals and is stronger when individuals have an emotional need to control the outcome.
If the coin has already been tossed and the outcome concealed. the idea of control over the outcome is clearly an illusion.if you ask people to bet on whether a coin toss will end in heads or tails. people will offer lower amounts when asked for bets. In this case.Example
People become even more overconfident when they feel like
they have control of the outcome . People act as if their involvement will somehow affect the outcome of the toss.
. most will bet larger amounts if you ask for the bet before the coin has been tossed. For example . People believe they are less likely to get into a car accident if they are driving than if they’re riding in the passenger seat.even when this is clearly not the case.
. are seen as controllable events. Some
situations like rather or not to run a red light or a stop sign.Controllable events
Each day an individual encounters many situations. A person can choose to stop or they may choose to ignore the traffic signals.
There are situations that are well outside of our individual
and collective grasps of control. perception defines the situation and often our realities
. there is one universal truth. rather the event is controllable or not. Still. he or she cannot make their significant other do anything. how a friend reacts to being cheated on is uncontrollable events for the cheater.
in the game of craps.This includes over-estimating the likelihood of positive events
Positive illusions are unrealistically favorable attitudes
that people have towards themselves or to people that are close to them. a player may throw the dice softly for low numbers .
The key attributes in illusion of control are Choice outcome sequence Task familiarity Information Active involvement
In the past. People who choose their own lottery numbers feel they have a better chance of winning than people that have numbers randomly given to them.Choice
The choice attribute refers to the mistaken feeling that an active choice induces control. e.g.
. Consider your local lottery game. most investors used full-service brokers who advised them and helped them make investment choices.
the higher the illusion of control. Modern investors must make their own choices as to what (and when) to buy and sell.Cont…
. the rise of the no-advice discount broker shifted the decision making more to the investor. The more active the investor is in the decision making.
The way in which an outcome occurs affects the illusion of control.
. Even something as simple and transparent as being right on the first two tosses of a coin can lead to an increased feeling of having the ability to predict the next toss. Positive outcomes that occur early give the person a greater illusion of control than early negative outcomes.
The more familiar people are with a task.
. the more they
feel in control of the task.g.
Invest in company in which u r most familiar. Investing has become a very familiar thing in our society.
When learning new information. or simply outdated. the greater the illusion of control. hearsay. Too little emphasis is placed on validity or accuracy. people place too much emphasis on how extreme or important it is.
Much of the information received is really noise and is not important .a lot of what we call information is inaccurate.Information
The greater the amount of information obtained.
The more people participate in a task. the greater their
feeling of being in control. and then place the trades.they must obtain and evaluate information. This is surely an example of active involvement. Investors using discount brokers must conduct their own investment decision-making process .
. Modern investors have high participation in the investment process. make trading decisions. People feel like they have a greater chance of winning a coin toss if they flip the coin.
and 3) self-reports of real-world behavior
. 2) observed behavior in familiar games of chance such as lotteries.Demonstration
The illusion of control is demonstrated by three
converging lines of evidence: 1) laboratory experiments.
. Researchers have found that traders.Illusion of control bias :Behaviors that can cause investment mistakes
Illusion of control bias can lead investors to trade more
than is prudent. especially online traders. believe themselves to possess more control over the outcomes of their investments than they actually do. Researchers have found that investors hold concentrated positions because they gravitate toward companies over whose fate they feel some amount of control. Illusions of control can lead investors to maintain under diversified portfolios. An excess of trading results. in decreased returns. in the end. That control proves illusory. and the lack of diversification hurts the investors’ portfolios. however.
worse. to investor over-confidence. in general. In fact. Illusion of control bias contributes.
. the use of these mechanisms most often leads to an overlooked opportunity or.Illusion of control bias :Behaviors that can cause investment mistakes
Illusion of control bias can cause investors to use limit
orders and other such techniques in order to experience a false sense of control over their investments. unnecessary purchase based on the occurrence of an arbitrary price. a detrimental.
Ellen Langer defines the illusion of control bias as the
“expectancy "of a personal success probability inappropriately higher than the objective probability would warrant.
Langer found that task familiarity.g. E.: langer observed that people who are permitted to select their own number in a hypothetical lottery game were also willing to pay a higher price per ticket than subjects gambling on randomly assigned numbers.
. competition and
active involvement can all inflate confidence and generates such illusions.
When subject to illusion of control bias.
. people feel as if they can exert more control over their environment than they actually can. Their study entitled “The Illusion of Control: What’s Luck Got to Do with It?”. An excellent application of this concept was devised by Andrea Breinholt and Lynnette Dalrymple. two researchers at Westminster College in Salt Lake City. Utah.
Breinholt and Dalrymple sought to examine subjects’
susceptibility to illusions of control as determined by the intersection of two common impulses: the desire for control. and the belief in good luck as a controllable attribute
”4 Fellner explored the mechanics of this bias as they apply. Germany. specifically. to investing behavior.
. She hypothesized that the illusion of control bias accounts for systematic capital shifts toward investments (stocks) that offer investors the illusion of control. The paper investigated factors influencing individual portfolio allocations. In her work. “Illusion of Control as a Source of Poor Diversification: An Experimental Approach.Research Review
Gerlinde Fellner of the Max Planck Institute for Research
into Economic Systems in Jena.
In her words: “Results indicate that subjects invest more in an alternative when they can exercise control on its return and less in the alternative where they do not. “Do individuals
invest more in a “lottery” (stocks) for which they can control the chance move?” Her hypothesis proved correct. This is especially pronounced when subjects can choose the investment alternative on which to exercise control.Research Review
The fundamental question asked was.”
. one individual may have influence over the outcome. Fellner’s research showed that investors
prefer to make investments over which they believe they can control the outcome. practitioners need to be fully cognizant of this tendency to want to make “controlled” investments and dissuade investors of the notion that they have control over investment outcomes. only the decision to invest or not to invest (in rare cases. not the rule). Many practitioners know that investors have no control over the outcome of investments they make.Research Review
In summary. but this is the exception.
Even the wisest investors have absolutely no control over the outcomes of the investments that they make the outcome
.S. And global capitalism actually is.Advice
First step on the road to recovery from illusion of control
bias is to take a step back and realize how complex U.
Don’t permit yourself to make financial decisions on what you can logically discern is an arbitrary basis
. do you really control the fate of that stock or the outcome of that purchase? Rationally. Does the trumpet really keep the elephants away? Applying the same concept to investing. just be-cause you have deliberately determined to purchase a stock. and no
stampede of elephants ensues..Advice
A villager blows his trumpet every day at 6 P.M. it becomes clear that some correlations are arbitrary rather than causal.
As you contemplate a new investment. Ask yourself: Why am I making this investment? What are the downside risks? When will I sell? What might go wrong? These important questions can help you to screen the logic behind a decision before implementing that decision. take a moment to
ponder whatever considerations might weigh against the trade.
including reminders spelling out the rationale that underlie each trade. Write down some of the important features of each investment that you make. and emphasize those at-tributes that you have determined to be in favor of the investment’s success.Advice
Once you have decided to move forward with an
investment. one of the best ways to keep illusions of control at bay is to maintain records of your transactions.
.Benefits to individual
Taylor and Brown have argued that positive illusions. Taylor and Brown argue that positive illusions are adaptive. since there is evidence that they are more common in normally mentally healthy individuals than in depressed individuals. are adaptive as they motivate people to persist at tasks when they might otherwise give up. including the illusion of control.
impede learning and predispose toward greater objective risk taking (since subjective risk will be reduced by illusion of control). so their perception is not more accurate overall
.Cost to individual
Illusions of control may cause insensitivity to feedback. Dykman et al. (1989) showed that depressed people believe they have no control in situations where they actually do.
One of the best ways to prevent your biases from affecting
your decisions is to keep the rational side of your brain engaged as often as possible. Success in investing ultimately is found by investors who can conquer these daily psychological challenges and keep a long-term perspective in view at all times.