Don’t Be Tricked By The Illusion of Control

Market Meditations | June 11, 2021

We cannot control everything in our lives. Unfortunately our minds often tell us otherwise. The existence of this bias, known as the illusion of control, was shown by a series of experiments run by Ellen Langer in the 1970s1. In 6 different experiments, participants played a game governed by chance and in each one, displayed that they believed they could have an impact on their chances of winning. Not only does this phenomenon exist, it also has negative impacts. In another study, traders were given the opportunity to play a game2

They were sat down at a computer and shown an index displayed as a graph. It changed at random every 0.5 seconds however the traders were told pressing 3 certain keys may or may not affect the outcome. Their job – to get the highest score. Afterwards they were asked if the 3 keys had any impact on their final score and interestingly the traders who displayed a higher illusion of control, also displayed significantly worse yearly trading performance.

Thinking you are able to control something when in reality you cannot, forces you to focus on matters that do not increase your chances of success as opposed to matters that do have an impact. As we have seen, this is detrimental to long term performance. It also has negative impacts on our psychology. If we believe that we have control over an event, and the ultimate outcome of that event is not desired we can blame ourselves, thinking we are somehow at fault. As Roman Emperor, and stoic philosopher Marcus Aurelius said “you have power over your mind – not outside events. Realize this, and you will find strength”.

In reality this is easier said than done, however, in our podcast with certified NLP coach Jimie, (listen here), he shared a method that can train our minds to carry out this behavior; reward yourself for the process, not the outcome. Applied to trading, when you follow through on your strategy, reward yourself, regardless of whether you won or lost that trade. Applied to personal finance, reward yourself for adhering to your monthly budget not hitting arbitrary net worth figures.

These rewards can be anything from a chocolate bar to a weekend hike. We are all susceptible to thinking we have greater control of life’s events than we actually do. Focus on things that you can influence, reward yourself for the process not the outcome and you can avoid getting tricked by the illusion of control.