The biases that skew every trader's judgement
Cognitive biases are systematic errors in judgement that feel like intuition but predictably distort decisions — and markets are engineered to exploit them. These pages explain the biases that most damage traders: loss aversion and the reluctance to cut losers, confirmation bias that filters out warning signs, anchoring to a purchase price, recency and availability that overweight the vivid and the recent, overconfidence after a winning streak, the gambler's fallacy and sunk-cost trap, and the herd mentality that fuels bubbles. Each page defines the bias, shows it in a real trading scenario, and gives concrete methods to recognise and reduce its pull.
Behavioral Biases: A behavioural bias is a systematic, predictable deviation from rational judgement caused by mental shortcuts (heuristics). In trading, the most consequential are loss aversion (losses hurt about twice as much as equivalent gains, so traders hold losers and cut winners), confirmation bias (seeking only agreeing evidence), anchoring (fixating on an irrelevant reference like entry price), recency and availability (overweighting recent or vivid events), overconfidence (overrating one's own skill and precision), the gambler's fallacy and sunk-cost fallacy, and herd mentality. Biases cannot be deleted, but they can be counteracted with awareness, rules, checklists and journaling that force evidence and process over impulse.
Loss Aversion
BiasLoss aversion is the well-documented tendency for the pain of a loss to feel roughly twice as intense as the pleasure of an equivalent gain, which pu…
Confirmation Bias
BiasConfirmation bias is the tendency to seek, notice and remember information that supports a view you already hold while discounting or avoiding eviden…
Anchoring Bias
BiasAnchoring bias is the tendency to rely too heavily on the first or most salient number encountered, such as an entry price or a stock's 52-week high,…
Recency Bias
BiasRecency bias is the tendency to give disproportionate weight to the most recent events and outcomes, so that a short run of wins or losses, or the la…
Hindsight Bias
BiasHindsight bias is the tendency, once an outcome is known, to see it as having been predictable all along, which makes past market moves look obvious …
Overconfidence Bias
BiasOverconfidence bias is the tendency to overestimate your own skill, the accuracy of your knowledge and your degree of control, which in trading drive…
Availability Bias
BiasAvailability bias is the tendency to judge how likely or important something is by how easily examples come to mind, so that vivid, recent or heavily…
Gambler's Fallacy
BiasThe gambler's fallacy is the mistaken belief that a run of one outcome in a sequence of independent events makes the opposite outcome more likely to …
Sunk Cost Fallacy
BiasThe sunk cost fallacy is the tendency to continue committing to a losing course of action because of resources already spent, time, money or effort t…
Survivorship Bias
BiasSurvivorship bias is the error of drawing conclusions from only the visible survivors, the traders, strategies and stocks that succeeded, while the f…
Herd Mentality
BiasHerd mentality is the tendency to follow the actions and beliefs of a larger group rather than your own analysis, so that traders buy what everyone i…
Optimism Bias
BiasOptimism bias is the tendency to overestimate the likelihood of good outcomes and underestimate the likelihood of bad ones happening to you specifica…