Illusion of Control
Feb. 27, 2008
My new favorite fallacy is the Illusion of control. This is a psychological condition in which a person believes they have control over a situation in which they actually have little to no control. In fact, a person's rate of control has more to do with how often they "win" than how frequently they influence the outcome of a random event. So a person who wins a lot will be more likely to believe they are influencing the outcome of random events, like dice. This is one of the contributing factors in gambling addiction.
Most interesting to me is a study done in 2003 of traders working in investment banks. The authors found that traders who were more susceptible to the illusion of control were more often the worst performers in their firms. Since I work for a trading firm, I wonder how much of what we do is based on this illusion. The longer I work in this industry, the more it seems to me that the markets are *mostly* random, and my only hope for making money is to tease out some small source of predictability or inefficiency and then exploit it for everything I can until it inevitably goes away.
Another thing I'm learning is that most traders in the world have no idea what they are doing. Check out the forums on Elite Trader. You know these guys are awesome because they are elite.
I added a sidebar to my page that indexes all of my shared items from Google Reader. You can subscribe to my share if you like the sites and you'll keep getting new awesome links filtered by yours truly.