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Biases That KILL Your Trading

“Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so.”
Douglas Adams

Confirmatory Bias

Confirmatory bias is the tendency to give greater weighting to information that supports our pet theories and beliefs, while minimizing disconfirming information. People have a natural tendency to filter information in a way that favors their preferred views. Many a failed business venture can be linked with the way in which the proprietor neglected unsupported information about prospects and overly inflated data favoring the venture.

Causality Bias

Causality bias is the natural human tendency to view the world as an organized, patterned environment where everything occurs for a reason. This perceptual quality is often extended into areas where such principles do not apply. The best example of this is gambling. Gamblers are very good at perceiving patterns and cause-effect relationships where there are no such processes operating. This bias can result in misjudgment of risks and the development of flawed spending & investment strategies.

Group Think Bias

Group think bias is where individuals in an organization overvalue particular ideas and decisions because of peer support. For example, a CEO may have a particular view and staff eager to facilitate career advancement may distort their own evaluation of the proposal to fit in with what they perceive the boss expects.

Losing traders have these biases. They are key reasons why trend followers win. As long as people fall prey to these biases, there will be opportunity to win their trading losses and profit in the great zero sum game.

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Thanks for your time, Grant S.

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