Illusion of Control Bias

Group Members
Abdur Raheem Adnan Arshad

M. Usama Asif
Zeeshan Ali

063 077 076 061

Abdur Raheem

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, in fact, they cannot.

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

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." (wikipedia) "The illusion of control refers to people's belief that they have influence over the outcome of uncontrollable events." Montier (2007) The illusion of control refers to people's belief that they have influence over the outcome of uncontrollable events." (Montier 2007, p. 22) The illusion of controlthe belief that we can influence the outcome of uncontrollable events" Montier (2010, p. 133)

Explanation
The illusion is more common in familiar situations, and in

situations where the person knows the desired outcome. Feedback that emphasizes success rather than failure can increase the effect, while feedback that emphasizes failure can decrease or reverse the effect. 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, including financial trading.[

Example
People become even more overconfident when they feel like

they have control of the outcome - even when this is clearly not the case. For example - if you ask people to bet on whether a coin toss will end in heads or tails, most will bet larger amounts if you ask for the bet before the coin has been tossed. If the coin has already been tossed and the outcome concealed, people will offer lower amounts when asked for bets. People act as if their involvement will somehow affect the outcome of the toss. In this case, the idea of control over the outcome is clearly an illusion. People believe they are less likely to get into a car accident if they are driving than if theyre riding in the passenger seat.

Controllable events
Each day an individual encounters many situations. Some

situations like rather or not to run a red light or a stop sign, are seen as controllable events. A person can choose to stop or they may choose to ignore the traffic signals, all together

Uncontrollable Events
There are situations that are well outside of our individual

and collective grasps of control. how a friend reacts to being cheated on is uncontrollable events for the cheater. he or she cannot make their significant other do anything. Still, rather the event is controllable or not, there is one universal truth; perception defines the situation and often our realities

Positive illusion
Positive illusions are unrealistically favorable attitudes

that people have towards themselves or to people that are close to them. in the game of craps, a player may throw the dice softly for low numbers .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

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

Cont

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

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.

Task Familiarity
The more familiar people are with a task, the more they

feel in control of the task. Investing has become a very familiar thing in our society.

E.g.

Invest in company in which u r most familiar.

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

Active Involvement
The more people participate in a task, the greater their

feeling of being in control. People feel like they have a greater chance of winning a coin toss if they flip the coin. Modern investors have high participation in the investment process. Investors using discount brokers must conduct their own investment decision-making process - they must obtain and evaluate information, make trading decisions, and then place the trades. This is surely an example of active involvement.

Demonstration
The illusion of control is demonstrated by three

converging lines of evidence: 1) laboratory experiments, 2) observed behavior in familiar games of chance such as lotteries, and 3) self-reports of real-world behavior

Illusion of control bias :Behaviors that can cause investment mistakes

than is prudent. Researchers have found that traders, especially online traders, believe themselves to possess more control over the outcomes of their investments than they actually do. An excess of trading results, in the end, in decreased returns. Illusions of control can lead investors to maintain under diversified portfolios. Researchers have found that investors hold concentrated positions because they gravitate toward companies over whose fate they feel some amount of control. That control proves illusory, however, and the lack of diversification hurts the investors portfolios.

Illusion of control bias :Behaviors that can cause investment mistakes

orders and other such techniques in order to experience a false sense of control over their investments. In fact, the use of these mechanisms most often leads to an overlooked opportunity or, worse, a detrimental, unnecessary purchase based on the occurrence of an arbitrary price. Illusion of control bias contributes, in general, to investor over-confidence.

 USAMA

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.

Findings
Langer found that task familiarity, competition and

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

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. An excellent application of this concept was devised by Andrea Breinholt and Lynnette Dalrymple, two researchers at Westminster College in Salt Lake City, Utah. Their study entitled The Illusion of Control: Whats Luck Got to Do with It?.

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, and the belief in good luck as a controllable attribute

Research Review
Gerlinde Fellner of the Max Planck Institute for Research

into Economic Systems in Jena, Germany. In her work, Illusion of Control as a Source of Poor Diversification: An Experimental Approach,4 Fellner explored the mechanics of this bias as they apply, specifically, 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. The paper investigated factors influencing individual portfolio allocations.

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. This is especially pronounced when subjects can choose the investment alternative on which to exercise control.

Research Review
In summary, Fellners research showed that investors

prefer to make investments over which they believe they can control the outcome. Many practitioners know that investors have no control over the outcome of investments they make, only the decision to invest or not to invest (in rare cases, one individual may have influence over the outcome, but this is the exception, not the rule). Thus, 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.

Zeeshan

Advice
First step on the road to recovery from illusion of control

bias is to take a step back and realize how complex U.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
A villager blows his trumpet every day at 6 P.M., and no

stampede of elephants ensues. Does the trumpet really keep the elephants away? Applying the same concept to investing, just be-cause you have deliberately determined to purchase a stock, do you really control the fate of that stock or the outcome of that purchase? Rationally, it becomes clear that some correlations are arbitrary rather than causal. Dont permit yourself to make financial decisions on what you can logically discern is an arbitrary basis

Advice
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? What might go wrong? These important questions can help you to screen the logic behind a decision before implementing that decision.

Advice
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. 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 investments success.

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

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

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.