Wednesday, October 26, 2016

Confirmation Bias & Psychological Projection - An Investor's Worst Enemy Can Be Himself.

Looking across the landscape of the investing and trading world, you will find many people blaming many things for lack of success in investing and trading.

The Algos.
The Flash Boys.
The Big Banks Manipulating.
The Fed.

The list goes on and on.  All these things are not the reason that people fail at trading and investing.  The reason for failure lies within, in Confirmation Bias.

An Excellent description of this phenomena that plagues mankind in all endeavors is found on Wikipedia:

"Confirmation bias, also called confirmatory bias or myside bias, is the tendency to search for, interpret, favor, and recall information in a way that confirms one's preexisting beliefs or hypotheses, while giving disproportionately less consideration to alternative possibilities. It is a type of cognitive bias and a systematic error of inductive reasoning. People display this bias when they gather or remember information selectively, or when they interpret it in a biased way. The effect is stronger for emotionally charged issues and for deeply entrenched beliefs. People also tend to interpret ambiguous evidence as supporting their existing position. Biased search, interpretation and memory have been invoked to explain attitude polarization (when a disagreement becomes more extreme even though the different parties are exposed to the same evidence), belief perseverance (when beliefs persist after the evidence for them is shown to be false), the irrational primacy effect (a greater reliance on information encountered early in a series) and illusory correlation (when people falsely perceive an association between two events or situations)."

Tangentially related, and readily observable in all walks of life is another phenomena that plagues mankind.  It may not be easy to see how it is applicable to trading and investing, but I would argue that all aspects of human psychology are applicable to this most difficult of vocations.  It requires wise introspection and objective self observation to see this in oneself & strong discipline to root it out wherever it is found.  This is in fact one of the primary reasons that managers fail in business, social relationships break down.

Again an excellent description from Wikipedia:

"Psychological projection is a theory in psychology in which humans defend themselves against their own unconscious impulses or qualities (both positive and negative) by denying their existence in themselves while attributing them to others. For example, a person who is habitually rude may constantly accuse other people of being rude. It incorporates blame shifting."

Happy Trading everyone.   The next few weeks should be... very interesting.