Gavin Caldecott January 30, 2024 Wealth Planning

The Illusion of Control: How We Can Be Our Own Worst Enemy in Investing

As humans, we have a strong desire for control and certainty. We want to understand the world around us, and we want to be able to predict and control the future. But when it comes to investing, this desire for control can lead us to make poor decisions. This is known as the “illusion of control.”

The illusion of control refers to the belief that we can predict and control the future, when in reality, the future is highly uncertain. This illusion can lead investors to make poor decisions, such as trying to time the market or chasing returns.

One of the biggest pitfalls of the illusion of control is the tendency to become overly confident in our ability to predict the future. We may think that we can predict when the market will go up or down, or that we can pick the next hot stock. But the reality is that the stock market is highly unpredictable, and no one can consistently predict its movements in the short-term (despite the news headlines, TV shows and online courses that make you think that this is possible).

Another pitfall of the illusion of control is the tendency to become emotionally attached to our investments. When we feel like we have control over our investments, we may become more emotionally invested in them and less likely to make rational decisions.

So, what can we do about this? One solution is to focus on building a well-diversified portfolio and sticking to a long-term investment strategy. By diversifying our investments, we can reduce our risk and avoid trying to predict market movements. Additionally, it’s important to understand that investing is a marathon, not a sprint, and to have patience and stay the course even when things are uncertain.

Additionally, it is important to have a financial plan in place and to review it regularly. This can help you stay focused on your long-term goals and make more informed decisions.

The illusion of control can lead investors to make poor decisions. By understanding this illusion, and focusing on building a well-diversified portfolio, sticking to a long-term investment strategy, and having a financial plan in place, investors can avoid the pitfalls of the illusion of control and be better equipped to reach their investment goals.


Source: Behavioral Finance and Wealth Management: How to Build Investment Strategies That Account for Investor Biases; Michael Pompian; 2012; https://onlinelibrary.wiley.com/doi/10.1002/9781119202400.ch8