Illusion of Control Bias

Group Members
 Abdur Raheem  Adnan Arshad

 M. Usama Asif
 Zeeshan Ali

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Abdur Raheem

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. .

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

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

Explanation The illusion is more common in familiar situations. Feedback that emphasizes success rather than failure can increase the effect. while feedback that emphasizes failure can decrease or reverse the effect. and in situations where the person knows the desired outcome. including financial trading.[ . 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.

 For example .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.  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. If the coin has already been tossed and the outcome concealed.even when this is clearly not the case. people will offer lower amounts when asked for bets.if you ask people to bet on whether a coin toss will end in heads or tails. In this case. the idea of control over the outcome is clearly an illusion. . most will bet larger amounts if you ask for the bet before the coin has been tossed.

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

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. he or she cannot make their significant other do anything. perception defines the situation and often our realities . how a friend reacts to being cheated on is uncontrollable events for the cheater. Still.

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

Adnan .

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

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

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

.Outcome Sequence  The way in which an outcome occurs affects the illusion of control. Positive outcomes that occur early give the person a greater illusion of control than early negative outcomes. 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.

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

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

Investors using discount brokers must conduct their own investment decision-making 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.Active Involvement The more people participate in a task. Modern investors have high participation in the investment process.they must obtain and evaluate information. the greater their feeling of being in control. make trading decisions. and then place the trades.

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. and  3) self-reports of real-world behavior .

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

worse. unnecessary purchase based on the occurrence of an arbitrary price.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. to investor over-confidence. Illusion of control bias contributes. in general. the use of these mechanisms most often leads to an overlooked opportunity or. . a detrimental. In fact.


.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.

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

Their study entitled “The Illusion of Control: What’s Luck Got to Do with It?”. two researchers at Westminster College in Salt Lake City. 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.Practical Application When subject to illusion of control bias.

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.

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. specifically.”4 Fellner explored the mechanics of this bias as they apply. Germany. 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. “Illusion of Control as a Source of Poor Diversification: An Experimental Approach.

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

one individual may have influence over the outcome. Thus.Research Review In summary. only the decision to invest or not to invest (in rare cases. . 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. not the rule). but this is the exception. Fellner’s research showed that investors prefer to make investments over which they believe they can control the outcome.

Zeeshan .

S. And global capitalism actually is. Even the wisest investors have absolutely no control over the outcomes of the investments that they make the outcome .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. it becomes clear that some correlations are arbitrary rather than causal.M. do you really control the fate of that stock or the outcome of that purchase? Rationally. Don’t permit yourself to make financial decisions on what you can logically discern is an arbitrary basis .. just be-cause you have deliberately determined to purchase a stock.Advice A villager blows his trumpet every day at 6 P. and no stampede of elephants ensues.

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. take a moment to ponder whatever considerations might weigh against the trade. .

. 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. and emphasize those at-tributes that you have determined to be in favor of the investment’s success. one of the best ways to keep illusions of control at bay is to maintain records of your transactions.

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

Dykman et al.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). so their perception is not more accurate overall . (1989) showed that depressed people believe they have no control in situations where they actually do.

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. .

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