Follow us on LinkedIn
What is the Illusion of Control Bias?
The illusion of control bias is a type of bias in behavioural finance that gives people the illusion of control. People that inherit this behaviour tend to overestimate the power or control they have over a circumstance. Therefore, they tend to think they have more control over events than they actually do. Even in situations where randomness or uncertainty plays a significant role, people tend to overestimate their control level.
In behavioural finance, the illusion of control bias is one of the positive illusions. These are illusions in which people have favourable attitudes towards themselves even when they are unrealistic. The illusion of control bias affects people of all fields. In finance and investing, where uncertainty is prevalent, this bias can be critical.
The term “illusion of control” comes from the work of Ellen Langer, a Harvard psychologist. In this work, the author conducted various experiments to check how this bias occurs. She found that there are several factors that play a role in people’s confidence. However, none of these included the end result. Instead, they focused on things that happened during the process.
How does the Illusion of Control Bias work?
The illusion of control occurs when people overload themselves with a substantial amount of information. When this happens, their brains start taking shortcuts that help them in the decision-making process. Taking shortcuts helps reduce the time and stress for these people. However, it also exposes them to the impression that they have control over the process.
In most circumstances, when people believe they have more control over something than they really do, they take shortcuts. They do so instead of taking their time to find logical solutions or contemplating alternative outcomes. For people, it also leads to believing in superstitions or paranormal events. Therefore, the illusion of control can give them a fake sense of control in circumstances where they don’t have any.
Why is the Illusion of Control Bias important?
The illusion of control bias shows how people make irrational decisions that lead to adverse outcomes. Most of these decisions come from overconfidence in the process that people put into it. Most people tend to ignore factors that would suggest not taking the decision. Instead, they end up placing confidence in decisions where chance or possibility plays a substantial role.
The illusion of control bias is also critical as third parties can use it to influence people’s decisions. Factors such as competition, choice, stimulus, or response familiarity affect how much confidence people put in their decisions. When people don’t understand the implications of their confidence, they end up making the wrong decisions.
How can individuals avoid the Illusion of Control bias?
Like most other biases, people can avoid the illusion of control bias by understanding how it works. They can also consider external sources of information rather than relying on their instincts. Similarly, through critical thinking during these decisions, people can avoid the illusion of control bias. It includes not establishing casual links between choices and outcomes when none exist.
The illusion of control bias refers to when people overestimate the control they have over an event. In that case, they end up taking the wrong actions, which leads to losses. There are several factors that may cause this type of bias to occur. Therefore, it is crucial for decision-makers to understand these and not allow them to influence their decisions.
Have an answer to the questions below? Post it here or in the forum
Technology Securely Digitizes the Issuance, Settlement, and Custody of Carbon Credits Service Uses Smart Contract Language, Deployed via Private Centralized Database or Private, Blockchain Technology for Enterprises Puro.earth to Register Carbon Removal Credits Using the Technology NEW YORK, Nov. 29, 2023 (GLOBE NEWSWIRE) — Nasdaq…