What more cognitive biases are
These are thinking distortions affecting trading decisions, beyond the biases covered in the basic psychology section. Recognizing them helps you defend better against yourself.
Some important biases
- Confirmation bias: the tendency to seek and believe only information supporting an existing view, ignoring contrary evidence. It makes you hold a wrong view longer than necessary.
- Anchoring: being fixated on a reference number, such as the original buy price, skewing decisions away from current reality.
- Sunk cost fallacy: continuing to hold a losing trade just because you've already put money and effort in, rather than reassessing objectively.
- Survivorship bias: looking only at surviving success cases while forgetting countless failures that vanished, leading to misjudged probabilities.
- Hindsight bias: after knowing the outcome, believing you could have predicted it, distorting learning from experience.
- Herding: following the crowd simply because many are doing it, especially dangerous at emotional extremes.
Why it matters and how to apply it
These biases work quietly and everyone has them, even the seasoned. The best defense isn't trying to eliminate them by willpower, but building rules and habits that reduce their room to intrude: keeping a journal to check thinking against reality, actively seeking evidence against your own view, and deciding by process rather than momentary feeling.
Common mistakes
- Seeking only information supporting your view and ignoring contrary signals.
- Holding a losing trade just because you've invested a lot in it, per the sunk cost fallacy.
- Learning the wrong lesson due to hindsight bias, thinking everything was obvious after the outcome.
- Following the crowd exactly at emotional extremes.
FAQ
- Can biases be fully eliminated? No. Everyone has them; the practical goal is building rules and habits to reduce their impact, not erasing them.
- What tool best counters biases? A trading journal and a structured decision process, because they force you to check thinking against reality and slow emotional reflexes.
- Why do skilled people still have biases? Because biases are features of how the brain works, independent of skill; awareness is the first step to defense.
Checklist
- ☐ Am I seeking only information that supports my view?
- ☐ Am I holding a trade just because I've invested a lot in it?
- ☐ Am I fixated on a reference number like the original buy price?
- ☐ Am I following the crowd without my own reason?