Illusion of Control Bias

Group Members
 Abdur Raheem  Adnan Arshad

 M. Usama Asif
 Zeeshan Ali

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Abdur Raheem

they cannot. in fact. .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.

Illusion of control is associated with under-estimation of risk. . the illusion of control is one of the positive illusions. Along with illusory superiority and optimism bias.Introduction 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.

22)  “The illusion of control—the belief that we can influence the outcome of uncontrollable events" Montier (2010.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. p." (wikipedia)  "The illusion of control refers to people's belief that they have influence over the outcome of uncontrollable events. 133) ."  (Montier 2007." Montier (2007)  The illusion of control refers to people's belief that they have influence over the outcome of uncontrollable events. p.

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

people will offer lower amounts when asked for bets. the idea of control over the outcome is clearly an illusion.  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.Example  People become even more overconfident when they feel like they have control of the outcome .  For example . 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.if you ask people to bet on whether a coin toss will end in heads or tails. If the coin has already been tossed and the outcome concealed. In this case.

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

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

This includes over-estimating the likelihood of positive events . 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. a player may throw the dice softly for low numbers .

Adnan .

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

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. . Consider your local lottery game.g. most investors used full-service brokers who advised them and helped them make investment choices. In the past.  e.

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

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

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

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

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

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

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

 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.

competition and active involvement can all inflate confidence and generates such illusions.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.g. .

An excellent application of this concept was devised by Andrea Breinholt and Lynnette Dalrymple. . Their study entitled “The Illusion of Control: What’s Luck Got to Do with It?”. Utah.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. 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.

“Illusion of Control as a Source of Poor Diversification: An Experimental Approach. . 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.”4 Fellner explored the mechanics of this bias as they apply. to investing behavior. Germany.Research Review Gerlinde Fellner of the Max Planck Institute for Research into Economic Systems in Jena. In her work. specifically.

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.Research Review  The fundamental question asked was. This is especially pronounced when subjects can choose the investment alternative on which to exercise control.

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

Zeeshan .

Advice First step on the road to recovery from illusion of control bias is to take a step back and realize how complex U. Even the wisest investors have absolutely no control over the outcomes of the investments that they make the outcome . And global capitalism actually is.S.

and no stampede of elephants ensues. 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.M. it becomes clear that some correlations are arbitrary rather than causal.Advice A villager blows his trumpet every day at 6 P.. just be-cause you have deliberately determined to purchase a stock. Don’t permit yourself to make financial decisions on what you can logically discern is an arbitrary basis .

. 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.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. . Write down some of the important features of each investment that you make.Advice Once you have decided to move forward with an investment. 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.

Taylor and Brown argue that positive illusions are adaptive. are adaptive as they motivate people to persist at tasks when they might otherwise give up. including the illusion of control.Benefits to individual Taylor and Brown have argued that positive illusions. . since there is evidence that they are more common in normally mentally healthy individuals than in depressed individuals.

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

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. .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.

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