Psychology is a central pillar in investing. You may be surprised to learn that there are multiple ways our minds can play tricks on our minds when it comes to making good investment decisions. There are two categories of psychological influences which can impair judgement and wreak havoc on our investment process. The categories are fallacies and illusions. Fallacies are mistaken beliefs based on flawed arguments. Illusions refer to a distortion of our senses that warp our perception of reality. We focus on three kinds of illusions which investors should be wary of.

Illusion of control

When it comes to money matters and investing, the illusion of control seems to manifest itself fairly often. For instance, investors tend to overestimate their ability to control events or outcomes. In reality, investing is a probabilistic exercise where we need to rely on insights and analysis to shape our investment theses. It is also an exercise where we should focus on the process, rather than outcomes....