Bravashift's recent thread viewtopic.php?f=36&t=26241 got me thinking a little more about cognitive biases & in which order throughout a trade or day they may impact upon us. I thought I'd start a new thread so it can be specific to the biases & not take away from the specific topic of Bravashift's thread or this one.
To start off I'd like to make it clear that I'm no expert on this topic neither am I settled on the order I've put them in... that said I'm hoping it opens up to some great discussion. Maybe the loop would be changed in others opinion & that's great because it's a topic I'd love to learn from the more experienced or thoughtful mind than mine.
1: Loss Aversion,
I put this at number 1 because I think it's right at the forefront of the mind when the trigger finger is twitching & it's a proven bias that people weight their thought towards what they could lose rather than what they could gain.
2: Recency Bias,
This one is a double edged sword for me, what I mean by that is that this bias can impact ourselves in such ways like putting more weight on our recent P&L over our lifetime P&L, but is also very prominent in the market, take for example a well known Jockey winning a few races.
3: Conformation Bias,
In my opinion I rate this pretty highly, probably because of my own experiences. It took me a very long time to see
I was ignoring the information in front of me that didn't give me positive feedback about the trade in which I was participating.
4: Sunk Cost Fallacy,
I think most of us have been here, especially when we start our journey... the refusal to take that loss, the willingness to be the captain that goes down with his ship.
5: Outcome Bias,
We decide what's right based on the outcome over process... I think this can lead us off course because if we've had to face a loss & deviated from the process, such as taking a trade in play then we can build bad habits off of the back of these outcomes.
6: Blind Spot Bias,
When we're trying to be unbiased that act in itself can lead us to being biased... & the loop therefore begins again.
I hope that some of you guys add your wisdom & experience,
Traders Cognitive Bias Loop
Good stuff James
This excellent link is worth re-posting again : https://upload.wikimedia.org/wikipedia/ ... dex_en.svg
This excellent link is worth re-posting again : https://upload.wikimedia.org/wikipedia/ ... dex_en.svg
Credit to ruthlessimon for first posting about it and to Peter for finding a direct link to it.Kai wrote: ↑Fri Sep 09, 2022 4:54 pmThis excellent link is worth re-posting again : https://upload.wikimedia.org/wikipedia/ ... dex_en.svg
Had it bookmarked ever since, very useful resource overall.
Well, from experience I feel it's maybe better to try and generate discussion when there is an immediate need for it (like when someone's asking for specific help), than to have one just for the sake of discussion itself, because the incentive to help will always be greater. And interest too, since it's likely others are experiencing similar issues.
For what it's worth, there probably is a generic loop of sorts when people first attempt trading, but later it can take a number of different directions, depending on which ones people are able to overcome etc.
As we know, it's practically impossible not to fall prey to one particular bias or another, I am not even sure if I ever executed a biasless perfect trade, despite thousands of attempts.
But then again, the markets don't generate that many (if any) perfect trading opportunities either, so you have to make due with less than ideal trade setups and conditions.
For what it's worth, there probably is a generic loop of sorts when people first attempt trading, but later it can take a number of different directions, depending on which ones people are able to overcome etc.
As we know, it's practically impossible not to fall prey to one particular bias or another, I am not even sure if I ever executed a biasless perfect trade, despite thousands of attempts.
But then again, the markets don't generate that many (if any) perfect trading opportunities either, so you have to make due with less than ideal trade setups and conditions.