Timmy
white swans need love too
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- 30 September 2007
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Very interesting article to be found at:
http://www.lifehack.org/articles/lifehack/7-stupid-thinking-errors-you-probably-make.html
This stuff could be relevant to my trading...
1) Confirmation Bias
The confirmation bias is a tendency to seek information to prove, rather than disprove our theories. The problem arises because often, one piece of false evidence can completely invalidate the otherwise supporting factors.
Consider a study conducted by Peter Cathcart Wason. In the study, Wason showed participants a triplet of numbers (2, 4, 6) and asked them to guess the rule for which the pattern followed. From that, participants could offer test triplets to see if their rule held.
From this starting point, most participants picked specific rules such as “goes up by 2“ or “1x, 2x, 3x.” By only guessing triplets that fit their rule, they didn’t realize the actual rule was “any three ascending numbers.” A simple test triplet of “3, 15, 317“ would have invalidated their theories.
2) Hindsight Bias
Known more commonly under “hindsight is 20/20“ this bias causes people to see past results as appearing more probable than they did initially. This was demonstrated in a study by Paul Lazarsfeld in which he gave participants statements that seemed like common sense. In reality, the opposite of the statements was true.
3) Clustering Illusion
This is the tendency to see patterns where none actually exist. A study conducted by Thomas Gilovich, showed people were easily misled to think patterns existed in random sequences. Although this may be a necessary by product of our ability to detect patterns, it can create problems.
The clustering illusion can result in superstitions and falling for pseudoscience when patterns seem to emerge from entirely random events.
4) Recency Effect
The recency effect is the tendency to give more weight to recent data. Studies have shown participants can more easily remember information at the end of a list than from the middle. The existence of this bias makes it important to gather enough long-term data, so daily up’s and down’s don’t lead to bad decisions.
5) Anchoring Bias
Anchoring is a well-known problem with negotiations. The first person to state a number will usually force the other person to give a new number based on the first. Anchoring happens even when the number is completely random. In one study, participants spun a wheel that either pointed to 15 or 65. They were then asked the number of countries in Africa that belonged to the UN. Even though the number was arbitrary, answers tended to cluster around either 15 or 65.
6) Overconfidence Effect
And you were worried about having too little confidence? Studies have shown that people tend to grossly overestimate their abilities and characteristics from where they should. More than 80% of drivers place themselves in the top 30%.
One study asked participants to answer a difficult question with a range of values to which they were 95% certain the actual answer lay. Despite the fact there was no penalty for extreme uncertainty, less than half of the answers lay within the original margin.
7) Fundamental Attribution Error
Mistaking personality and character traits for differences caused by situations. A classic study demonstrating this had participants rate speakers who were speaking for or against Fidel Castro. Even if the participants were told the position of the speaker was determined by a coin toss, they rated the attitudes of the speaker as being closer to the side they were forced to speak on.
Studies have shown that it is difficult to out-think these cognitive biases. Even when participants in different studies were warned about bias beforehand, this had little impact on their ability to see past them.
What an understanding of biases can do is allow you to design decision making methods and procedures so that biases can be circumvented. Researchers use double-blind studies to prevent bias from contaminating results. Making adjustments to your decision making, problem solving and learning patterns you can try to reduce their effects.
http://www.lifehack.org/articles/lifehack/7-stupid-thinking-errors-you-probably-make.html
This stuff could be relevant to my trading...
1) Confirmation Bias
The confirmation bias is a tendency to seek information to prove, rather than disprove our theories. The problem arises because often, one piece of false evidence can completely invalidate the otherwise supporting factors.
Consider a study conducted by Peter Cathcart Wason. In the study, Wason showed participants a triplet of numbers (2, 4, 6) and asked them to guess the rule for which the pattern followed. From that, participants could offer test triplets to see if their rule held.
From this starting point, most participants picked specific rules such as “goes up by 2“ or “1x, 2x, 3x.” By only guessing triplets that fit their rule, they didn’t realize the actual rule was “any three ascending numbers.” A simple test triplet of “3, 15, 317“ would have invalidated their theories.
2) Hindsight Bias
Known more commonly under “hindsight is 20/20“ this bias causes people to see past results as appearing more probable than they did initially. This was demonstrated in a study by Paul Lazarsfeld in which he gave participants statements that seemed like common sense. In reality, the opposite of the statements was true.
3) Clustering Illusion
This is the tendency to see patterns where none actually exist. A study conducted by Thomas Gilovich, showed people were easily misled to think patterns existed in random sequences. Although this may be a necessary by product of our ability to detect patterns, it can create problems.
The clustering illusion can result in superstitions and falling for pseudoscience when patterns seem to emerge from entirely random events.
4) Recency Effect
The recency effect is the tendency to give more weight to recent data. Studies have shown participants can more easily remember information at the end of a list than from the middle. The existence of this bias makes it important to gather enough long-term data, so daily up’s and down’s don’t lead to bad decisions.
5) Anchoring Bias
Anchoring is a well-known problem with negotiations. The first person to state a number will usually force the other person to give a new number based on the first. Anchoring happens even when the number is completely random. In one study, participants spun a wheel that either pointed to 15 or 65. They were then asked the number of countries in Africa that belonged to the UN. Even though the number was arbitrary, answers tended to cluster around either 15 or 65.
6) Overconfidence Effect
And you were worried about having too little confidence? Studies have shown that people tend to grossly overestimate their abilities and characteristics from where they should. More than 80% of drivers place themselves in the top 30%.
One study asked participants to answer a difficult question with a range of values to which they were 95% certain the actual answer lay. Despite the fact there was no penalty for extreme uncertainty, less than half of the answers lay within the original margin.
7) Fundamental Attribution Error
Mistaking personality and character traits for differences caused by situations. A classic study demonstrating this had participants rate speakers who were speaking for or against Fidel Castro. Even if the participants were told the position of the speaker was determined by a coin toss, they rated the attitudes of the speaker as being closer to the side they were forced to speak on.
Studies have shown that it is difficult to out-think these cognitive biases. Even when participants in different studies were warned about bias beforehand, this had little impact on their ability to see past them.
What an understanding of biases can do is allow you to design decision making methods and procedures so that biases can be circumvented. Researchers use double-blind studies to prevent bias from contaminating results. Making adjustments to your decision making, problem solving and learning patterns you can try to reduce their effects.