Illusion of control can cloud judgment in investing from "summary" of Beyond Greed and Fear:Understanding Behavioral Finance and the Psychology of Investing by Hersh Shefrin
The illusion of control can lead investors to overestimate their ability to predict the outcomes of their investments. When individuals believe that they have control over a situation, they tend to be more confident in their decisions. This confidence can cloud judgment and lead to risky investment choices. Investors may feel that they have the power to influence the market or the performance of a particular asset, when in reality, there are numerous external factors at play that are beyond their control. This illusion of control can be especially dangerous in the world of investing, where uncertainty and unpredictability are inherent. Despite the best efforts of investors to research, analyze, and strategize, the market can still behave irrationally and unexpectedly. By assuming that they have more control than they actually do, investors may take on unnecessary risks or fail to adequately diversify their portfolios. Furthermore, the illusion of control can lead investors to engage in behaviors that are counterproductive to their long-term financial goals. For example, individuals may become overly active in managing their investments, buying and selling assets frequently in an attempt to outperform the market. This excessive trading can result in higher transaction costs, tax implications, and emotional stress, ultimately detracting from overall returns. To combat the illusion of control, investors must acknowledge the limitations of their ability to predict and influence market outcomes. By adopting a more humble and realistic approach to investing, individuals can make more informed decisions that are based on sound financial principles rather than misplaced confidence. Embracing a passive, diversified investment strategy can help mitigate the risks associated with the illusion of control and improve long-term portfolio performance.
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