It’s clouds’ illusions I recall . . . trading and the illusion of control

Humans have a great capacity for exercising control over their environment and for detecting patterns in the confusing mass of information they face. This capacity can also mislead; not least in financial markets.

English: This is an optical illusion in which ...
This is an optical illusion in which a static image appears to be moving due to the cognitive effects of interacting color contrasts and shape position. (Photo credit: Wikipedia)

Have you ever looked at the clouds and seen faces or the shapes of animals. Did you as a child see monsters start to form in the sounds and patterns of a darkened room? Perhaps you have played with optical illusions such as the one on the right.

Human perception is a process of sense-making and pattern recognition. We recognize people, places and situations, without even noticing the process, as we go about our daily lives. We are hard-wired to seek out and recognise patterns. Without this capacity we could not function, but it can also mislead us. One of our most fundamental drives is to make sense of the world and control it.

Years ago  I worked in a therapeutic community with adolescents who were the survivors of childhood abuse. Time and time again we saw that in their desperation to make sense of the abuse they had suffered, they would rather believe it was their fault and that they were bad people than accept that they were helpless and had no control over these terrible events.

This is just as much a factor in the less extreme situations of our everyday lives, and in our work lives; including financial decisions. Being helpless and out of control generates such negative emotions that we are highly motivated to re-establish control. If establishing control is hard or impossible, just like the survivors of abuse, we often succumb to comforting illusions.

Håll tummarna!
Håll tummarna! (Photo credit: Wikipedia)

The ‘illusion of control‘ was first studied by Ellen Langer  who demonstrated this tendency to assume we are more in control than is realistically possible. Her initial work was in gambling studies. In one study participants were given lottery tickets, with the lottery numbers pre-chosen. They were then given the opportunity to pay for the right to choose their own numbers.

Dice (Photo credit: Wikipedia)

Many did this despite it having no effect on the odds of winning. Langer explained this in terms of the greater perceived control when you choose your own numbers. Similarly, most people when asked to rate the attractiveness of a bet based on guessing the outcome of a dice throw, give a higher rating when the dice still have to be thrown, compared with a bet in which the dice  have already been thrown and are hidden under a cup. If the dice have still to be thrown, there is a greater sense of control over the outcome, although the odds remain the same in both cases.

Conditions leading to illusions of control for traders

Illusions of control can be an especial problem for traders. Trading is skilled work, but good traders often lose money and poor traders can get lucky. There is a lot of noise in the relationship between skill and performance. This can be a source of enormous performance anxiety for traders. The trader who gets lucky early on and develops an undeserved reputation (and bonus) for good judgement will feel under great pressure to maintain a level of performance that is beyond them. The good trader who is having a period of bad luck and diminished confidence can see earnings and reputation suffer. But traders build up financial commitments that reflect their earnings and faced with an inability to sustain performance (and status) can feel under tremendous pressure to take unreasonable risks or bend the rules.

This is exacerbated by the human capacity to fool ourselves. Not only are we loss averse, taking risks to avoid loss, but commonly we seek to avoid negative emotion.  This can be useful in focusing us on behaviours likely to resolve the situation causing distress. However, we sometimes engage in less productive strategies to resolve the pain; hiding behind self-protective illusions. Individuals deprived of a sense of control make active efforts to restore it cognitively. Some  cope with the discrepancy between desire for control and the world they face  by denial and retreat into self-protective illusion [1].

Key elements of the trading environment are particularly conducive to the development of illusions of control as we describe below:

Noisy feedback

Markets are in practice very ‘noisy’: there is a lot of trading going on that is not based on information genuinely relevant to the  value of an asset [4]. On any individual trade it will be difficult to tell whether an outcome (positive or negative) is the result of trading on information or of essentially unpredictable market movements.  Hence, it will often be difficult to determine whether an outcome was contingent on a trader’s information and skill. At the same time traders are highly motivated to establish causal relationships between information they hold and market movements.


Illusions of control are more common in circumstances of stress [5]. Trading is a highly stressful activity in terms of workload, time pressure, visibility and uncertainty coupled with limited control opportunities, and professional traders suffer much higher levels of free-floating anxiety than the general population [6].


Illusions of control are more common in competitive environments [2, 3]. The process of trading is innately competitive. The markets in which traders deal, are founded on competition between market actors. Furthermore, for professional traders, dealing rooms are often highly competitive environments.

Implemental mind set

Illusions of control are both more common and more severe when conditions induce an implemental (focus on goals) mind-set than when they induce to adopt a deliberative (reflection on action-outcome contingencies) mind-set [7]. The bonus system and associated targets are designed to keep traders goal-focussed. The short-term nature of information advantages also means that traders are unlikely to forgo the opportunity to trade in order to learn more about the value of information or a strategy, by observing the market.

Choice, involvement and familiarity

Choice, involvement and familiarity can act as  cues suggesting that skill is relevant, leading to an illusion of control [2]. Trading involves continually making choices but more importantly requires close focus on a particular type of instrument or market. Traders are often highly identified with the instruments or markets in their area of expertise.

Illusions of control and trading performance

In a study of  107 traders in four City of London investment banks, we used a computer based task to measure propensity to illusions of control [8]. The findings were striking. Trader performance was inversely related to susceptibility to illusions of control including as measured by managerial ratings of risk management performance. Traders with high illusions of control were paid significantly less, contributed less on average to desk profits and were rated by managers as poorer at analysis and risk management.

Illusions of control are just one example of the human capacity for self-deception. As any con man knows, properly motivated by strong emotions such as fear, status anxiety or greed, people are endlessly creative in their capacity for self-deception. Intelligence is no defence since it simply implies greater cognitive resources to be marshalled in the cause of self-deception.  Emotions guide what we pay attention to; and these effects don’t just apply to middle ranking traders. It seems at least plausible that senior managers in large financial institutions who failed to ask what extraordinary risks attached to extraordinary profits being made in sub-prime mortgages or who failed to notice the systematic rigging of the LIBOR rates were in the grip of self-deceiving illusions fostered by intense pressures for success and fear of failure.

Paradoxically, those who show the least emotion may often be at greatest risk. There is evidence that people who manage their emotions by suppressing them may, in the end show stronger effects of those emotions than those who consciously attend to them and use strategies such as ‘reframing’ to modify their emotions [9].

1.            Carver, C., M. Scheier, and J. Weintraub, Assessing coping strategies: a theoretically based approach. Journal of Personality and Social Psychology, 1989. 56(2): p. 267-283.

2.            Langer, E.J., Roth, J., Heads I win, tails its chance: The illusion of control as a function of outcomes in a purely chance task. Journal of Personality and Social Psychology, 1975. 32: p. 951-955.

3.            Langer, E.J., The illusion of control. Journal of Personality and Social Psychology, 1975. 32(2): p. 311 – 328.

4.            Willman, P., et al., Noise Trading and the Management of Operational Risk; Firms, Traders and Irrationality in Financial Markets. Journal of Management Studies, 2006. 43(6): p. 1357-1374.

5.            Friedland, N., G. Keinan, and Y. Regev, Controlling the uncontrollable: effects of stress on illusory perceptions of controllability. Journal of Personality and Social Psychology, 1992. 63(6): p. 923.

6.            Kahn, H. and C.L. Cooper, Stress in the dealing room1993, London: Routledge.

7.            Gollwitzer, P.M. and R.F. Kinney, Effects of Deliberative and Implemental Mind-Sets On Illusion of Control. Journal of Personality and Social Psychology, 1989. 56(4): p. 531-542.

8.            Fenton-O’Creevy, M., Nicholson, N., Soane, E.,  & Willman. P. Trading on illusions: Unrealistic perceptions of control and trading performance. Journal of Occupational and Organizational Psychology, 2003. 76: p. 53-68.

9.            Butler, E.A., F.H. Wilhelm, and J.J. Gross, Respiratory sinus arrhythmia, emotion, and emotion regulation during social interaction. Psychophysiology, 2006. 43(6): p. 612-622.

7 thoughts on “It’s clouds’ illusions I recall . . . trading and the illusion of control”

  1. Hello Mr. Fenton-O’Creevy,

    I am currently working on a thesis for school and my research brought me here. Your article “Trading on Illusions” fits my topic perfectly but I it seems that I cannot access the article (I guess my school does not have access to Wiley library). Is there any chance you could send me the pdf document via mail?

    Thank you very much in advance


  2. An excellent article! I am a professional trader after 10 years of trading in investment banking and I practice meditation in many forms including Yoga and Zazen. I’d like to know something more about “reframing”


    1. Vince, thanks for your comment.

      Reframing is deliberately thinking about something in a different way to change how you feel about it. An example might be the experienced trader who makes a large loss and considers it not in the context of the day but in the context of gains and losses across the year or across a career.

      In a future blog post I plan to discuss different strategies for managing emotions in more detail.


  3. I agree with many of the things you say about “the illusion of control” and its impact on traders. I especially agree that suppressing emotions is very dangerous. Emotions provide us with valuable information. I’m an individual futures trader. I early retired after 33 years as a Health Care Actuary so I know something about risk and seeing false patterns. After 33 years of forecasting Medical Costs, I know the future is “UNKNOWABLE.” I also meditate everyday and practice “Mindfulness” as often as I can (which unfortunately, is appallingly rare).

    I see things a little differently than you. I’ve studied psychology both as my college major and recently. I’ve read many books on psychology of trading and other situations. I especially like Kahneman and Tversky’s work.

    My first difference isthat trading is competition with other market players. Nothing could be further from the truth. Many traders may think that’s who they are competing againt. I suspect almost of them lose money. The Master Trader knows he/she is trading against him or her self. We trade against all those human characteristics you mention, emotions, seeing patterns where they don’t exist, thinking we can predict market movement, etc. Profitable traders in any time frame have a methodology that produces an edge and the discipline to trade that methodology. It has nothing to do with what anyone else does. Sure, someone like Goldman Sachs can move the market. So what. No one can know in advance.

    The second is stress. There are very few things that are inherently stressful. Having a gun to our head, or WWI trench warfare. Trading is not inherently stressful. Some people allow themselves to get stressed and some people are fine. A reporter once asked Reggie Jackson how he handles the stress of coming to bat in the bottom with the game on the line. His answer was, “What stress? I live for batting with the game on the line.” Reggie was a clutch hitter. Maybe that’s why.

    My final thought is more controversial and esoteric and goes to the idea that the outcome is the same whether the dice have already been thrown or not. There have been a number (I can’t remember them off hand) that recordings of music or sound patterns have been altered after the recording based on what people think. My point is we know less about something as simple as things already done can’t change than we think we know. However, I’m now getting into the metaphysical and as traders we should assume we have know control over the market. For those interested in these kinds metaphysical thoughts, I recommend reading “In Search of Schrodinger’s Cat.” Erwin Schrodinger was one of the co-discovers of Quantum Physics.

    I leave you with two final thoughts. The first is that I think “Mindfulness” is great for successful trading. I mean “trading in the moment.” Just before and after I put in a stop entry order, I take stock of the feelings in my body. If I don’t like them, I don’t make that trade. Our holistic selves processes millions of more bits of information than our conscious minds can. And finally, a Master Trader once said to me, “Love your losses.” I didn’t understand it at first. I finally understood that profits are the result of taking small loses. As you said above, most traders hate their loses so avoid them until the pain is too great. When you love your losses, you love taking a 5 tick loss because it didn’t become a 20 tick loss.

    Thanks for starting this.

    Allan Gold


    1. Allan,

      many thanks for your comment. I am particularly interested in what you have to say about mindfulness. There is increasing evidence from neuroscience research that mindfulness practice does improve self-regulation abilities, including the regulation and use of emotion. In my research I have begun to look at the impact of mindfulness practice on the ability to respond flexibly moment by moment to the environment, including in trading. This is a topic I shall return to in a later blog post.

      Mark Fenton-O’Creevy


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