24 May Illusion of Control
Most people choose their favorite number combination when playing the lottery. Perhaps they are trying to turn a game of chance into a game of skill. Most hold a special meaning behind their numbers (for instance, significant dates), while others simply have lucky numbers. Regardless of how convincing these self-justifications seem to be, there is no scientific support for their choices. When the wheel spins, all numbers are equal. So what is the illusion of control?
The ‘illusion of control’ is a cognitive bias and psychological phenomenon. This is the tendency to think that they have the power to influence future outcomes, despite there being no rational reason for this belief. In an experiment published by the Journal of Occupational and Organizational Psychology, researchers studied the behavior of over 100 traders from various banks in London. Using an innovative computer task, designed to assess the illusion of control in the field, researchers tracked the relationship between investor performance and their behavior related bias. Results showed that the traders who were heavily influenced by the illusion of control earned less.
With investments and finances, the illusion of control is evident in investors’ tendencies to avoid international investments. Many of them feel that they are more in control of investments in their own countries. Consequently, they miss opportunities to increase their wealth – they stick to a one-dimensional strategy that actually carries more risk. Do you know how to strategically approach diversifying your portfolio?
Here at LexION Capital, we use data-driven and scientific insights to ensure healthy portfolios, bespoke to our clients’ personal goals and priorities.