Ever wonder why sometimes it just seems to take forever for the elevator door to close despite how many times you hit the close door button? \u00a0That’s because the button doesn’t work – at least on the vast majority of elevators and usually if it does, only with a fireman’s key. \u00a0“Liar!”, you shout! \u00a0“I was in an elevator the other day and pressed the button and guess what – the door closed.” \u00a0OK….<\/p>\n
90% of the “walk” buttons on New York City street corners haven’t worked since the 1980’s when the city implemented a new automated\u00a0traffic control system. \u00a0Department of Transportation officials left them in place as “placebo buttons”, presumably to keep people from jay-walking rather than to increase happiness stemming from the illusion of control.<\/p>\n
The “illusion of control” has been a well documented psychological phenomenon\u00a0since the term was first coined in 1975 by Ellean Langer,\u00a0who believed the phenomenon was largely due to people’s failure to perceive the difference between luck and skill. \u00a0Even in obviously random chance situations, experiments reveal people’s tendency to attribute success to their own skill and failure to bad luck. Her experiments concluded\u00a0that early success can firmly embed a “skill orientation”. \u00a0In “Heads I win, tails it’s chance” she documents her\u00a0subjects predicting the outcome of thirty coin tosses. \u00a0The feedback was rigged such that while all subjects were right exactly half the time, the sequence of success was altered. \u00a0Those subjects with early success not only rated themselves as “better” at the task but over-remembered their success rate and predicted future success.<\/p>\n
Gamblers at casino craps tables tend to throw the dice harder for high numbers and more softly for low numbers. \u00a0People are willing to pay four times as much for lottery tickets where they pick the numbers. \u00a0Drivers estimate that accidents happen less frequently when they’re in the driver’s seat than when they’re in the passenger seat.<\/p>\n
“Control is an illusion, you infantile egomaniac. \u00a0Nobody knows what’s gonna happen next: not on a freeway, not in an airplane, not inside our own bodies and certainly not on a racetrack with 40 other infantile egomaniacs” – Dr. Claire Lewicki, Days of Thunder<\/p><\/blockquote>\n
Certainly\u00a0the illusion of control and other behavioural biases developed in our brains over the centuries for our benefit. However, that doesn’t mean these biases\u00a0can’t adversely impact certain areas of our lives today. \u00a0This is certainly true in the field of investment and financial management. \u00a0“That wouldn’t happen to me” might\u00a0lead people to ignore life insurance, put off executing wills and fail to maintain an adequate emergency fund. \u00a0When it comes to\u00a0investing, illusion of control behaviour is not likely to lead to beneficial\u00a0outcomes either. \u00a0One study conducted on traders from investment banks in London (Fento-O’Creevy et al, 2003) found that those who exhibited higher levels of illusion of control tended to perform worse than those exhibiting\u00a0lower levels.<\/p>\n
The Australian Securities and Investments Commission (ASIC) conducted experiments and found those prone to control biases were more likely to invest in risky hybrid securities and less likely to choose\u00a0a diversified portfolio. \u00a0With investing it is extremely difficult to differentiate between luck and skill. \u00a0Those who succeed early are very likely to attribute that success to skill and that belief is not likely to serve them will in the future. \u00a0Reversion to the mean is much more common than repeated success, however current winners tell and market their stories as if they have discovered a magic formula\u00a0for continued outperformance. \u00a0Investment professionals may indeed be\u00a0more susceptible to these psychological biases than their clients.<\/p>\n
Perhaps it’s just\u00a0that the illusion feels better than reality. \u00a0We hit the elevator door button repeatedly in frustration but feel a rush of satisfaction when eventually we see the door close. And the funny thing is that the knowledge that the button doesn’t work is almost incidental\u00a0– even if you know, you’ll still press it, willing the doors to close or summoning the\u00a0walking green man to appear at your command like some genie from an ancient bottle rubbed.<\/p>\n
Interestingly, the illusion of control also comes into effect\u00a0in the opposite situation. \u00a0People tend to underestimate<\/em> their ability to exert control when they actually have a high degree of control. \u00a0When it comes to financial matters, to a large extent you control how much you spend, where and how hard you work and therefore how much you earn. \u00a0The net impact is you can control how much you save and invest. \u00a0You can also control who you choose to give you advice.<\/p>\n
The key take away from all this? \u00a0Take more control over things you can control and\u00a0be wary of impulse and advice where control is illusory.<\/p>\n
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Ever wonder why sometimes it just seems to take forever for the elevator door to close despite how many times you hit the close door button? \u00a0That’s because the button doesn’t work – at least on the vast majority of elevators and usually if it does, only with a fireman’s key. \u00a0“Liar!”, you shout! \u00a0“I […]<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,19,7,15],"tags":[],"class_list":["post-564","post","type-post","status-publish","format-standard","hentry","category-all-posts","category-financial-planning","category-graham-bodel-posts","category-risk-and-return"],"_links":{"self":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/564","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/comments?post=564"}],"version-history":[{"count":5,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/564\/revisions"}],"predecessor-version":[{"id":570,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/564\/revisions\/570"}],"wp:attachment":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/media?parent=564"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/categories?post=564"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/tags?post=564"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}