Trading on Illusions: Unrealistic Perceptions of Control and Trading Performance
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What they found
The authors studied 107 professional traders at four London investment banks, measuring their illusion of control with a computer task in which they believed they could influence a random index by pressing keys (they could not). Traders who showed a stronger illusion of control had lower performance ratings from managers, earned less, and were rated as worse at risk management and analysis. The effect held after controlling for experience and role, suggesting that overestimating your influence over outcomes is a specific, measurable trait that hurts professional trading.
What you can use
- Professionals who believed they could influence random outcomes were rated worse and paid less; the illusion of control is a performance liability.
- Feeling in control after a run of wins is a warning sign, not a confirmation of skill.
- Distinguish sharply between outcomes you influence (execution, sizing, discipline) and those you do not (where the price goes).
Caveats
Performance measured by manager ratings and pay, not P&L. One-time measurement of the bias. Psychology journal.
Tags: professional, illusion-of-control, psychology, investment-banks
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.