Investing under the Illusion of Control

By Elif Çalışkan

The illusion of control is a cognitive bias which causes us to assume that we have exact control over the outcome of a situation when actually we do not. However, it is a very common strategy to cope with disappointments, difficulties, and other uncomfortable feelings (Aftab, 2013). The influence of the control bias can be insincere also during investing. We will explain 4 effects of investing under the illusion of control.

Being Optimistic

Being optimistic is a tendency for beliefs to align with interests. Psychology and economics explain it as optimism bias. Because having any knowledge about something leads to focus on the bright side while making a decision or after making a decision. So, we tend to believe that what we have done is proper. Such behavior is being conducted unconsciously so that available public information is being neglected due to the optimistic behavior. Therefore, valuable information can be ignored while making a decision (Pompian, 2013).

Being Overconfidence

The bias contributes to being overconfident. So, it returns on long‐term investment results. Likewise, in these circumstances, we believe surrounding financial difficulties don’t impact our beliefs, emotions, and behaviors in a negative way. On the other hand, success or lack is usually a result of uncontrollable factors like corporate performance and the general economy (Admin, 2018). Also, it can lead investors to trade more than is prudent. For instance, Researchers have found that traders, especially online traders, believe themselves to have more control over the outcomes of their investments than they actually do (Swayze, 2018).

Under-diversifying

The bias leads to concentrate investment into businesses or sectors which a person believes that have control over also in some way leads him under-diversifying. Also, if the investor is a former bank employee, he may favor his stock over competitors. However, this increases risk and exposes him to losses that might have been mitigated by a more diverse portfolio. Researchers have also found that investors generally concentrate on positions because they gravitate toward companies over whose fate they feel some amount of control (Swayze, 2018).

Falling Through

When an entrepreneur incorrectly feels like everything is under his control, his company may not make decisions that are best for its sake. Cost and effort can be underestimated, while profits and other positive outcomes may be overestimated. Finally, the team ends up with a project that failed and resources that were wasted (Pietroluongo, 2018). The entrepreneur had a positive belief because he would want to gain a better outcome than whatever has become. Since we can rarely control the outcome, we tend to control our expectations instead. That’s why despite we want to be the most successful one, we may fail. Because we can’t always control our expectations (Rao, ?).

REFERENCES

Admin. (2018, April 9). The illusion of control bias.

Aftab, U. (2013). The Illusion of Control – You Are Your Worst Enemy.

Pietroluongo, L. (2019, March 15).Leaning into the Illusion of Control to Smash Business Goals

Pompian, M. (2012, January 2). Illusion of Control Bias.

Rao, G.You May Be A Victim of The Sobering Effect!.

Riaz, T., & Iqbal, H. (2015). Impact of Overconfidence, Illusion of control, Self Control and
Optimism Bias on Investors Decision Making; Evidence from
Developing Markets.
 Research Journal of Finance and Accounting, 6(11), 110-116.

Swayze, S. (2018, July 24). How Does the “Illusion of Control” Impact Your Leadership or Business?.