Professional Documents
Culture Documents
Group number 3:
• Hamza Wahid Malik 18272720-
032
• Hassan Amir 18272720-090
• Waqar Younas 18812720-012
• Shawaiz Haider 18272720-112
2
HAMZA WAHID MALIK
18272720-032
DEFINE ILLUSION OF CONTROL
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Illusion of Control
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What is illusion of control:
• Illusion of control is the tendency for people
to overestimate their ability to control events.
For instance to feel that they control
outcomes that they demonstrably have no
influence over.
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Example:
• let’s say you decide to purchase a lottery ticket. Which
option makes you feel better about your chances to
win:
1. A ticket where you get to choose the numbers?
2. A ticket with randomly generated numbers?
• Rationally, you know that each ticket has the exact same chance of winning, but if
you are human, you probably prefer the one with your birthday, your high school
jersey number, your shoe size, and your lucky number. You don’t have any more
control by picking these numbers, but you may feel at least a slight boost in
confidence. For the lottery it doesn’t really matter which method you choose as it
has no impact on the ultimate outcome. But in investing, this can be a very
dangerous bias.
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“effects of Illusion of control Bias can have harmful effects
for investors as seen below.”
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1:
• Illusion of control bias contributes, in general, to
investor overconfidence. In particular, investors who
have been successful in business or other professional
pursuits believe that they should also be successful in
the investment realm. What they find is that they may
have had the ability to shape outcomes in their
vocation, but investments are a different matter
altogether.
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HASSAN AMIR
18272720-090
PRACTICAL APPLICATION
RESEARCH REVIEW
Why your brain cheats
• 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.
ILLUSION OF CONTROL BIAS.
• For example, people are willing to pay more
money for a lottery ticket if they get to choose
the numbers themselves than if the numbers
are chosen by a computer at random..
ILLUSION OF CONTROL BIAS.
• Rationally, you know that each ticket has the
exact same chance of winning, but if you are
human, you probably prefer the one with your
birthday, your high school jersey number, your
shoe size, and your lucky number. You don’t
have any more control by picking these
numbers, but you may feel at least a slight
boost in confidence.
A lottery ticket is cheap
• A lottery ticket is cheap, so the effect of this cognitive bias is
relatively benign. But consider the same bias when choosing stocks
or other financial instruments: the potential fallout is far more
severe.
• Worse, the illusion of control means you blame yourself when
things don’t turn out as planned. You start retrospectively analyzing
where you went wrong:
• “Did I invest enough?”
• “Did I invest at the right time?”
• “Did I invest in the right things?”
• This isn’t just stressful, but misjudging the cause of your errors can
lead to further disappointment
RESEARCH REVIEW Source: Breinhold and Dalrymple, 2004.
18272720-112
ADVICE
FINAL THOUGHT
ADVICE
• Four Advice
• 1. Recognize that successful investing is a
probabilistic activity.
The first step on the road to recovery from
illusion of control bias is to take a step back
and realize how and global capitalism actually
is.
• 2. Recognize and avoid circumstances that
trigger susceptibility illusions of control.
ADVICE
• 3. Seek contrary viewpoints.
• As you contemplate a new investment, 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?
ADVICE
• 4. Once you have decided to move forward
with an investment, one of the best ways to
keep illusions of control at bay is to maintain
records of your transactions, including
reminders spelling out the rationale that
underlie each trade.
FINAL THOUGHT
• Rationally, we know that returns on long-term
investments aren’t impacted by the immediate-term
beliefs, emotions, and impulses that often surround
financial transactions. Instead, success or lack
thereof is usually a result of uncontrollable factors
like corporate performance and general economic
conditions.
• 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.
Thank You
So Much