The Disposition Effect is a well-documented psychological bias where traders tend to sell winning stocks too early and hold onto losing stocks too long. Most of the studies in the field of behavioral finance have attributed this phenomenon to prospect theory, a core concept in trading psychology, where traders exhibit risk aversion when thinking about profits and risk-seeking behavior when...
The Endowment Effect is a cognitive bias where people place a higher value on things they own compared to identical things they don’t. It explains why you might hesitate to sell an old car at a fair market price or why collectors overprice items they own. Recent research suggests that this bias is not just about valuing possessions but also about how people process information and make...
Familiarity bias in trading is a psychological tendency that leads investors to prefer assets and markets they know well, often at the expense of better opportunities elsewhere. Instead of objectively analyzing all available options, they stick to what feels "safe," even when better opportunities exist. This cognitive bias is present when traders consistently choose stocks from their home...
The Framing Effect is a cognitive bias where the way information is presented influences decision-making, even when the underlying facts remain the same—a concept frequently explored in trading psychology. Imagine you’re at the supermarket and see two labels: “90% fat-free” yogurt “10% fat” yogurt Even though both statements mean the same thing, people tend to prefer the “90% fat-free” option...
When traders find themselves in a losing position, logic should dictate an exit. But instead of cutting their losses, many double down, convinced that the trade will turn around if they just hold on (or buy even more). This is an escalation of commitment, a powerful cognitive bias that causes traders to irrationally cling to failing trades, not because of market fundamentals, but because of an...
Money illusion is an economic theory that suggests that people think in terms of absolute dollar values rather than real purchasing power. This happens because inflation and currency value changes aren’t always factored into decision-making—an oversight often explored in trading psychology. A common example of a Money Illusion in everyday life is salaries. If you receive a 5% pay raise but...
Information bias is the tendency to seek excessive information, believing that more data leads to better decisions, even when the extra information is irrelevant or misleading—a behavior often addressed in trading psychology. We make thousands of decisions on a daily basis. Some are tougher; some are easier. But usually, the best ones are those made quickly, before we are influenced by the...
I have four things for you this week: A very interesting market update given the turmoil in the markets this week A psychological bias that is super common and really hurts traders Position sizing tip to keep you in the game How to think about stop losses to improve your performance Let’s jump in...Stock Market Update for 15 March 2025This week was certainly not the most fun long side traders...
Loss aversion is a psychological bias where the pain of losing feels much stronger than the joy of winning—a core concept in trading psychology. In everyday life, this explains why people avoid selling a house at a loss, even if it's a rational decision, or why they hold onto outdated technology because they "paid too much to replace it." When it comes to stock trading, anyone can talk about...
The Disposability Effect is a cognitive bias where people undervalue things they already own, leading them to discard useful resources prematurely. Imagine buying a high-quality kitchen appliance, only to throw it away after a few minor issues instead of repairing it. This mindset isn’t just wasteful; it reflects a deeper illusion in trading psychology that can be financially devastating when...
As humans, we love to stay consistent with our past decisions even when they’re wrong. This is known as Commitment and Consistency Bias, a cognitive shortcut where we subconsciously justify and stick with previous choices to avoid the discomfort of admitting mistakes—one of many patterns explored in trading psychology. For example, imagine you bought an expensive gym membership at the start of...
The Decoy Effect is a well-documented psychological bias that subtly manipulates decision-making by introducing a target option that makes one of the other choices appear significantly more attractive. This subtle manipulation was first introduced in a 1982 study as the “Asymmetric Dominance Effect” and is now widely used in consumer choice strategies, pricing models, trading psychology, and...