Behavioral Finance and Your Portfolio

7Belief Perseverance Bias #5: Illusion-of-Control Bias

I claim not to have controlled events, but confess plainly that events have controlled me.

—Abraham Lincoln

Bias Description

Bias Name: Illusion of control

Bias Type: Cognitive

Subtype: Belief perseverance

General Description

The Illusion-of-control bias, another form of dissonant behavior, describes the tendency of human beings to believe that they can control or at least influence outcomes when, in fact, they cannot. This bias can be observed in Las Vegas, where casinos play host to many forms of this psychological fallacy. Some casino patrons swear that they are able to impact random outcomes such as the product of a pair of tossed dice. In the casino game “craps,” for example, various research has demonstrated that people actually cast the dice more vigorously when they are trying to attain a higher number or when an “important” roll is happening. Some people, when successful at trying to predict the outcome of a series of coin tosses, actually believe that they are “better guessers,” and some claim that distractions might diminish their performance at this statistically arbitrary task.

Example of Illusion of Control Bias

When subject to Illusion-of-control bias, people feel as if they can exert more control over their environment than they actually can. An excellent application of this concept was devised by Andrea Breinholt and Lynnette Dalrymple, two researchers at Westminster College in Salt Lake City, ...