Weve all had that one group project, and theres always [623334]

your
BRAIN
AGAINST
YOU
5 WAYSThe top
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We’ve all had that one group project, and there’s always
been that one guy who estimates the project will take X
amount of time, cost X amount of the budget and take X
amount of work. He’s sure he’s right, but the reality of
today is quite di !erent. This is overconfidence bias.
Here’s the thing about all gamblers – they’re not even
aware they’re gambling. Logic dictates that every throw of
the dice is independent, however heuristic programming
tricks the mind into thinking this is not so by looking for
dependencies in sequences.
We see gambler’s fallacy every day. Take the weather for
example. It’s been raining for 4 days straight. There can’t
possibly be any more water to pour down, the sun has to
come out tomorrow, it will. Well, unfortunately this is not
the case.
Or, take for example the roulette table at the casino.
You’ve thrown red 3 times already. The next has to be
black, right? You take your chance. Wrong. It can be red
again. The roulette wheel has no sequence, your
assumptions are misleading.
How to avoid representativeness? Make a plan and stick
to it. Sometimes it’s useful to see patterns, other times not.
Pick and choose your trades wisely and don’t be led
astray by false sequencing. Remember the price won’t
change just because you wish it to do so. In trading, overconfidence bias means investors
overestimate their trading abilities, knowledge and skills.
For example, a trader has a very successful week, his
trades have all went right. He begins to think he has
amazing investment skills and opens more trades with
higher volumes. Then he loses. This is what makes
overconfidence especially dangerous, and in trading it
can cost you big!
Having confidence in your decisions is great, but overconfidence is not. How to avoid falling
victim to overconfidence bias? Never stop checking facts, focus on what you could be doing
better, not how skilled a trader you think you are. Simply – trade smart!Over confidence
Representativeness:
gambler’s fallacy and hot hand“Don’t
overestimate
your knowledge
and skills”
“Your
assumptions are
misleading”
“All gamblers
are not even
aware they’re
gambling”

Given the choice between gaining £5 with the equal
chance of losing £5 or not taking the chance at all, which
would you chose? By and large, most people would rather
do nothing than risk losing money. This is loss aversion bias
and in trading, it can mean you’ll meet a dead end.
Say you have a car, you’ve put a lot of e !ort into it and
have become quite attached. But, now has come the time
to sell. You post an ad online setting the price at £1000.
The thing is, no one has called and it’s already been a
long time. Suddenly, the phone rings with an o !er of £500.
It’s not what you were looking for, but you sell at the lower
price because you’re afraid you won’t sell at all. This is
disposition bias and it can be very risky for traders.
In trading, disposition bias is represented when a trader is
holding onto losing stocks far too long or maybe selling
their winners too soon. Either way, the trader is failing to
reconsider their position, letting the fear of losing
jeopardise a potentially successful trade. Remember, in
most situations, a ‘paper loss’ is as real as a realised loss.
How to avoid it? Disposition bias is heavily ingrained into human heuristics; however, it can be
averted by making a trading plan and sticking to it. Ensure your trades are smart, set stop and
profit limits and make notes of successful and unsuccessful trades.
Accept your mistakes and learn from them.People perceive loses and gains di !erently, with loses
having a much stronger impact than gains. Loss aversion
bias in trading is characterised by a trader failing to take
action when they should.
How to avoid loss aversion bias? No one is saying take
risks, the message here is don’t let your fear of loss a !ect
your trading strategy – stick to it. Make decisions based
on analysis, not fear. Use stop limits and accept that
mistakes can happen and losses are part and parcel of
trading. Afraid to lose:
loss aversion bias
Playing it safe:
disposition bias“Loses having
a much stronger
impact than
gains”
“Not reconsidering
your position and
explaining losses as
“it’s only a paper is
the biggest trading
error”

Apple’s going up, China heading down, what’s next?
Who’s trading what? Where? And when? Herding bias is
the trading equivalent of keeping up with the Joneses,
meaning if everyone else is doing it this way, it must be
correct.
Capital.com is a regulated investment company. We believe in smart investing.Take smoking, for example, in the1930s – 1950s doctors
even advised smoking cigarettes. It was further
popularised by ‘cool’ movie stars like Marlene Dietrich and
Clark Gable. The result was that more and more people
began to take up the habit and this was despite available
evidence at the time that smoking was harmful to health.
The company’s flagship product is a cutting-edge investment platform, powered by AI.
It allows individuals to trade shares, indices, commodities and Forex CFDs. How to avoid herding bias? Trade based on knowledge,
not what everyone else is doing.
With us you can gain the knowledge to manage risk and make the right investment decisions,
wherever you are. We embrace innovation. Our dev team applies artificial intelligence and
neural networks to come up with the ultimate user-friendly experience and AI-tailored
personalised financial content.Trading with the pack: herd bias
About Capital.com“If everyone
else is doing it
this way, is it
correct?”