Aug 21, 2013

13 Cognitive Biases to be aware of by traders and investors

Here are 12 Cognitive Biases that prevent human beings from behaving rationally.  As perception is reality in the financial markets, I thought it might be useful to address those issues through the lens of a trader.

1. Confirmation Bias

This is a fatal flaw of trading; we tend to surround ourselves with information that validates our own point of view and dismiss input that conflicts with our reasoning (also known as cognitive dissonance).  This is the primary reason why we always strive to see “both sides of every trade” as the residual grist between variant views is where education—and profitability—resides. 

2. In-Group Bias

This is a manifestation of confirmation bias, or the tendency to surround ourselves with those who share similar takes on the tape. This could pertain to our physical environment or a virtual experience, such as Twitter.  Not only does this provide a false sense of security in our individual viewpoints, it makes us suspicious—or angry—with outsiders who dare to question how we feel.