Illusion of Control Bias

Group Members
 Abdur Raheem  Adnan Arshad

 M. Usama Asif
 Zeeshan Ali

063 077 076 061

Abdur Raheem

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. in fact. .

Introduction The effect was named by psychologist Ellen Langer and has been replicated in many different contexts. the illusion of control is one of the positive illusions. . Illusion of control is associated with under-estimation of risk. Along with illusory superiority and optimism bias. It is thought to influence gambling behavior and belief in the paranormal.

" (wikipedia)  "The illusion of control refers to people's belief that they have influence over the outcome of uncontrollable events." Montier (2007)  The illusion of control refers to people's belief that they have influence over the outcome of uncontrollable events. p. 22)  “The illusion of control—the belief that we can influence the outcome of uncontrollable events" Montier (2010. 133) . p."  (Montier 2007.Different Definitions  "The illusion of control is the tendency for human beings to believe they can control or at least influence outcomes which they clearly cannot.

[ . The illusion is strengthened by stressful and competitive situations. including financial trading. while feedback that emphasizes failure can decrease or reverse the effect. The illusion is weaker for depressed individuals and is stronger when individuals have an emotional need to control the outcome. and in situations where the person knows the desired outcome.Explanation The illusion is more common in familiar situations. Feedback that emphasizes success rather than failure can increase the effect.

the idea of control over the outcome is clearly an illusion. If the coin has already been tossed and the outcome concealed. people will offer lower amounts when asked for bets. . most will bet larger amounts if you ask for the bet before the coin has been tossed.if you ask people to bet on whether a coin toss will end in heads or tails.  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.Example  People become even more overconfident when they feel like they have control of the outcome . In this case.  For example .even when this is clearly not the case. People act as if their involvement will somehow affect the outcome of the toss.

Controllable events Each day an individual encounters many situations. are seen as controllable events. Some situations like rather or not to run a red light or a stop sign. all together . A person can choose to stop or they may choose to ignore the traffic signals.

how a friend reacts to being cheated on is uncontrollable events for the cheater. Still. rather the event is controllable or not. there is one universal truth.Uncontrollable Events There are situations that are well outside of our individual and collective grasps of control. perception defines the situation and often our realities . he or she cannot make their significant other do anything.

This includes over-estimating the likelihood of positive events . a player may throw the dice softly for low numbers . in the game of craps.Positive illusion Positive illusions are unrealistically favorable attitudes that people have towards themselves or to people that are close to them.

Adnan .

Key Attributes The key attributes in illusion of control are  Choice  outcome sequence  Task familiarity  Information  Active involvement .

 e.Choice The choice attribute refers to the mistaken feeling that an active choice induces control. People who choose their own lottery numbers feel they have a better chance of winning than people that have numbers randomly given to them. . most investors used full-service brokers who advised them and helped them make investment choices. Consider your local lottery game.g. In the past.

Cont…  However. the higher the illusion of control. The more active the investor is in the decision making. Modern investors must make their own choices as to what (and when) to buy and sell. the rise of the no-advice discount broker shifted the decision making more to the investor. .

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.Outcome Sequence  The way in which an outcome occurs affects the illusion of control.

. the more they feel in control of the task.Task Familiarity The more familiar people are with a task.g.  E. Investing has become a very familiar thing in our society. Invest in company in which u r most familiar.

Information The greater the amount of information obtained. When learning new information. Too little emphasis is placed on validity or accuracy. Much of the information received is really noise and is not important .a lot of what we call information is inaccurate. the greater the illusion of control. . hearsay. people place too much emphasis on how extreme or important it is. or simply outdated.

they must obtain and evaluate information. . make trading decisions.Active Involvement The more people participate in a task. and then place the trades. Investors using discount brokers must conduct their own investment decision-making process . Modern investors have high participation in the investment process. This is surely an example of active involvement. People feel like they have a greater chance of winning a coin toss if they flip the coin. the greater their feeling of being in control.

2) observed behavior in familiar games of chance such as lotteries. and  3) self-reports of real-world behavior .Demonstration The illusion of control is demonstrated by three converging lines of evidence:  1) laboratory experiments.

Illusions of control can lead investors to maintain under diversified portfolios. in decreased returns. That control proves illusory. believe themselves to possess more control over the outcomes of their investments than they actually do. . however. in the end. An excess of trading results. and the lack of diversification hurts the investors’ portfolios. especially online traders. Researchers have found that traders. Researchers have found that investors hold concentrated positions because they gravitate toward companies over whose fate they feel some amount of control.Illusion of control bias :Behaviors that can cause investment mistakes Illusion of control bias can lead investors to trade more than is prudent.

In fact. to investor over-confidence. a detrimental. worse. . unnecessary purchase based on the occurrence of an arbitrary price. Illusion of control bias contributes. in general. 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.

 USAMA .

Technical Description Ellen Langer defines the illusion of control bias as the “expectancy "of a personal success probability inappropriately higher than the objective probability would warrant. .

Findings Langer found that task familiarity.: 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. E. competition and active involvement can all inflate confidence and generates such illusions.g. .

. Their study entitled “The Illusion of Control: What’s Luck Got to Do with It?”.Practical Application When subject to illusion of control bias. people feel as if they can exert more control over their environment than they actually can. An excellent application of this concept was devised by Andrea Breinholt and Lynnette Dalrymple. Utah. two researchers at Westminster College in Salt Lake City.

and the belief in good luck as a controllable attribute .Practical Application 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.

”4 Fellner explored the mechanics of this bias as they apply. She hypothesized that the illusion of control bias accounts for systematic capital shifts toward investments (stocks) that offer investors the illusion of control. “Illusion of Control as a Source of Poor Diversification: An Experimental Approach. to investing behavior.Research Review Gerlinde Fellner of the Max Planck Institute for Research into Economic Systems in Jena. In her work. The paper investigated factors influencing individual portfolio allocations. . Germany. specifically.

“Do individuals invest more in a “lottery” (stocks) for which they can control the chance move?” Her hypothesis proved correct.Research Review  The fundamental question asked was. 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. This is especially pronounced when subjects can choose the investment alternative on which to exercise control.” .

Thus. one individual may have influence over the outcome. . but this is the exception. Fellner’s research showed that investors prefer to make investments over which they believe they can control the outcome. only the decision to invest or not to invest (in rare cases.Research Review In summary. not the rule). Many practitioners know that investors have no control over the outcome of investments they make. 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.

Zeeshan .

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.

Does the trumpet really keep the elephants away? Applying the same concept to investing. Don’t permit yourself to make financial decisions on what you can logically discern is an arbitrary basis . it becomes clear that some correlations are arbitrary rather than causal.. and no stampede of elephants ensues. do you really control the fate of that stock or the outcome of that purchase? Rationally.M. just be-cause you have deliberately determined to purchase a stock.Advice A villager blows his trumpet every day at 6 P.

take a moment to ponder whatever considerations might weigh against the trade. 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. .Advice As you contemplate a new investment.

. one of the best ways to keep illusions of control at bay is to maintain records of your transactions. and emphasize those at-tributes that you have determined to be in favor of the investment’s success. including reminders spelling out the rationale that underlie each trade.Advice Once you have decided to move forward with an investment. Write down some of the important features of each investment that you make.

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. including the illusion of control.Benefits to individual Taylor and Brown have argued that positive illusions. . are adaptive as they motivate people to persist at tasks when they might otherwise give up.

Cost to individual Illusions of control may cause insensitivity to feedback. so their perception is not more accurate overall . Dykman et al. (1989) showed that depressed people believe they have no control in situations where they actually do. impede learning and predispose toward greater objective risk taking (since subjective risk will be reduced by illusion of control).

Conclusion  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. .