The Illusion of Control
In most elevators, at least in any built or installed since the early nineties, the door-close button doesn’t work. It is there mainly to make you think it works. (It does work if, say, a fireman needs to take control. But you need a key, and a fire, to do that.) Once you know this, it can be illuminating to watch people compulsively press the door-close button. That the door eventually closes reinforces their belief in the button’s power. ”The “Illusion of Control” is a well-researched behavioral bias that describes the tendency of people to believe that they have control over random circumstances. The elevator’s door-close, or “placebo” button is a classic case. Hall of Famer Richie Ashburn was an outfielder in major league baseball with a funny superstition. When Ashburn had a good hitting day, he liked to continue using the same bat to keep the streak going. Fearful of getting a “hot” bat mixed up with his others, he would bring it home and sleep with it under his bed. Psychologists have theorized that the illusion of control may occur because people place more weight on outcomes that are consistent with their desires, and less weight on those that are undesired. As EJ Lance put it, “heads I win, tails it’s chance.” We tend to seek out coherent narratives that have explanatory power and exaggerate their consistency in the real world. Hence, when Ashburn used the same bat, and got another hit the next day, he likely concluded that it was because he used the same bat that he succeeded. When he failed to get a hit the next day, well that was just bad luck, and time for a new bat.
Game 1: Lottery ticketYou are going to buy a lottery ticket. Which do you prefer?
- Choice 1: A ticket where you get to choose the numbers?
- Choice 2: A ticket with randomly generated numbers?
Game 2: Car Accident PossibilityHere are two scenarios, and you can choose a likelihood number from scale from -5 (much less likely) through 0 (average) to +5 (much more likely) : Compared to other drivers, how likely do you think you are of being involved in a road accident when _______?
- Scenario 1: you are driving
- Scenario 2: you are a passenger
Applications in Finance:
“Studies of investor behavior tell us some surprising things about the decisions they make… 85% of sell or exchange decisions are wrong — the investor would do better by doing nothing or going the other way that 85% of the time. Simple random decision making (with no investment knowledge) would have yielded about 50% good decisions.”The illusion of control may affect traders’ behaviors. Perloff (1983) states that those who underestimate the risks they are taking may have greater difficulty in adjusting should the negative event occur. Fento-O’ Creevy, etal (2003) also found that “Traders with higher levels of illusion of control perform less well than those with lower levels.” In this experiment, a sample of 107 traders were chosen from four investment banks in London. Of the 107 participants, 52 were traders, 40 were trader managers, and 15 were senior managers (66% were bachelor degree holders, and 36% had a higher degree). The experiment shows a significant inverse relationship between performance and illusion of control. When the traders were more heavily influenced by the illusion of control, they earned less. Detailed experiment design and results can be found here. Illusion of control makes us fool ourselves and keeps us from learning from our mistakes.
—Martin Conrad, Barron’s
- Langer, Ellen J. (1975), “The Illusion of Control”,Journal of Personality and Social Psychology 32 (2): 311–328
- Fento-O’Creevy, Nicholson, Soane and Willman (2003), “Trading on illusions: Unrealistic perceptions of control and trading performance”, Journal of Occupational and Organizational Psychology, 76 (1): 53-68