Updated: Jan 12
How much control do we really have over the events in our lives? For example, how many times have we left for work with ample time to allow for traffic yet an accident occurs on the highway and we end up nevertheless being late?
Illusion of control is the tendency to believe that we can control or influence outcomes that we have no influence over.
We may have a 5-year plan set up for ourselves and hit every short-term goal, yet ultimately fall short on the long-run outcome due to unforeseen circumstances.
Even Jerry Seinfeld couldn’t foresee the power outage that would cause his clocks to stop and, therefore, make his friend Jean-Paul late for his all-important marathon. In this classic episode of Seinfeld, Jerry issues a wakeup call for his friend, sets multiple alarms including Kramer’s “mental” alarm, and adjusts all of the knobs on the alarms to the correct volume yet there is still something out of his control- Kramer’s need to run his hot tub all night. While hilarious for Jerry & the gang, this life perspective -having control over certain events- has implications for investors as well.
The illusion of control bias leads investors to believe they can control or influence the outcome of their investment decisions.
You may think that because you research the market and watch the news, that you are more likely to have some control over this. While these types of behaviors are beneficial for the novice (or any) investor, we must guard ourselves against thinking that all outcomes are within our control when most of them are not.
What would an Investor Do?
An investor under this illusion might buy and sell stocks significantly more than he holds stocks, yet “portfolio turnover does not improve overall average performance”. He might end up trading, say, Google’s parent company Alphabet, because he saw controversial headlines about Google for a week straight.
Smart investors recommend focusing on the facts and ignoring emotions when making investment decisions as a prevention method.
You will notice patterns and begin to realize most things, such as timing the market, are out of your control. In fact, this super fun game illustrates our point. Go ahead and try your best to beat a buy & hold strategy! You’ll see that even armed with insights & market trends you are not foolproof.
How to Overcome Illusion of Control
When you realize you might be performing under the illusion of control, illusion of knowledge, or experiencing overconfidence, it’s important to take a step back to regroup and perhaps work passively as you try to eliminate yourself of these biases.
Diversifying your portfolio and adding global markets can help you minimize overall risk, and think to choose patience over activity when needed.
ETFication is committed to educating you with the best investment tools and resources (like the market timing game) that will demonstrate to you what works for your investment needs.