Trading on illusions: Unrealistic perceptions of control and trading performance

Abstract

This paper examines the impact of illusory control beliefs on the performance of traders in financial instruments. The authors argue that the task and environment faced by traders are conducive to the development of illusions of control and that individual propensity to illusion of control will be (inversely) related to trader performance. Using an innovative computer task, designed to assess illusion of control in the field, data from 107 traders in four organizations showed individual differences in this bias to have a significant, inverse, association with performance, as measured by managers' ratings of trader performance and by total remuneration. The authors conclude that, at least in this context, illusion of control is maladaptive and that it is productive to take an individual difference approach to the study of such illusions. Implications for debates about the costs and benefits of positive illusions are discussed.

Hindsight Bias, Risk Perception, and Investment Performance

“…This is in the line of several recent field experiments on financial decision and psychology. 3 Our analysis is also in the line of several recent papers empirically relating psychological constructs to economic variables (see Camerer (1987), Fenton O'Creevy (2003, Biais et al (2005), and Glaser and Weber (2007)). …”

Overconfidence and trading volume

“…They find that men trade more than women which is consistent with overconfidence models. Fenton-O'Creevy et al [2003] analyze the link between psychological and economic variables empirically using data on the behavior of professional traders. They measure illusion of control [Langer, 1975;Presson and Benassi, 1996] by a computer-based task.…”

Overconfidence, risk aversion and individual financial decisions in experimental asset markets

“…Research findings suggest that investors' overconfidence can result in trade aggressiveness (Deaves, Lüders, & Luo, 2009;Glaser, Nöth, & Weber, 2004), portfolio nondiversification (Odean, 1999), pursuit of the active portfolio management strategy (De Bondt & Thaler, 1984) and suboptimal performance (Barber & Odean, 2000, 2001Fenton-O'Creevy, Nicholson, Soane, & Willman, 2003). Moreover, overconfident investors tend to underestimate risks and, as a result, take more risks in comparison to rational traders (Croson & Gneezy, 2008;Glaser et al, 2004;Lakonishok, Shleifer, & Vishny, 1992;Russo & Schoemaker, 1992).…”