Authority Bias in Trading: How It Destroys Trader Profits

Break Free from Authority Bias in Trading & Make Independent Decisions - Table of Contents

Have you ever made an investment decision simply because an expert, a famous investor, or a financial guru said it was a good idea? If so, you’ve fallen victim to authority bias, a common cognitive bias in financial markets.

This bias is natural and widely studied in trading psychology, because from the moment we’re born, we’re taught to listen to authority. As kids, we trust our parents to keep us safe. We rely on teachers to show us the right way to learn. We listen to older siblings because they seem to know more than we do. This human tendency to trust authoritative figures helps us survive in early life, but it doesn’t always serve us well in trading.

Just think about how often mainstream financial decisions are influenced by hype around a particular stock, claiming it’s a “must-buy.” Many retail investors rush in, only to see the share price tank shortly after. This happens because they place too much trust in the judgments of authority figures rather than using critical thinking and objective, systematic analysis. The tendency of people to trust a legitimate authority figure in investing often leads to poor performance when actual market conditions shift unexpectedly.

How Authority Bias Impacts Trading Decisions

Authority bias can be particularly damaging in trading because it leads to:

Blindly Following Market Predictions: Analysts and fund managers love making confident predictions, but the reality is that market conditions are unpredictable. If you rely on their words instead of a proven trading system, you risk trading based on the opinions of authority figures rather than facts.
Overriding Your System’s Rules: A well-designed trading system removes emotional biases and opinions from your trades. But if you hear an authoritative figure say, “This is a once-in-a-lifetime opportunity,” you might ignore your system’s signals and take an unnecessary risk.
Herd Mentality and Market Bubbles: Many traders assume that if a celebrity investor is buying a stock, they should follow suit. This is what drives speculation in the stock market and creates bubbles, which inevitably crash when the hype disappears, leading to negative outcomes.
Fear of Missing Out (FOMO): When a respected figure publicly endorses a stock, traders may panic and jump in too late—buying at inflated prices and suffering from bad outcomes. This human nature response often leads to poor decisions based on cognitive errors rather than solid analysis.

Availability Heuristic and Anchoring Bias in Trading

Investors often fall into the availability heuristic, where they make investment decisions based on the most readily available information, often from authoritative figures. If a well-known investor praises a stock, traders may assume it’s a solid investment without conducting deeper research. Similarly, anchoring bias leads traders to rely too heavily on the first piece of information they hear—such as a past share price—instead of analyzing current market conditions.

Example: Authority Bias in Action

Remember when Warren Buffett said he was buying airline stocks in early 2020? Many traders followed his lead. A few months later, he sold them all at a loss. Those who blindly followed authority on investing without considering their system’s rules got burned. This example illustrates how self-attribution and hindsight biases play into investment decisions, making it seem like an original decision was wise, even when the actual performance says otherwise

The Role of Trading Systems in Mitigating Authority Bias

The best way to protect yourself from authority bias is to trade systematically. A trading system removes cognitive errors, processing errors, and reliance on outside opinions.

Here’s why systematic trading helps:

Objective, Rule-Based Decisions: You don’t need to rely on expert opinions. Your system tells you when to buy and sell based on actual performance.
Consistent Execution: A proven, backtested system will outperform gut-based decisions over time.
No More Guesswork: You won’t be swayed by behavioral finance studies, media hype, or the latest “hot stock” tip from a financial influencer.
Avoiding the Sunk Cost Fallacy: Traders sometimes hold on to losing trades because of past investments. A system eliminates this cost fallacy by enforcing strict exit rules.

Challenges Systematic Traders Face with Authority Bias

Even systematic traders are not completely immune to authority bias. Here’s how it can still affect you:

Tweaking Your System Based on News or Expert Commentary: If you hear a famous trader on CNBC saying, “I would never buy this stock,” you might second-guess a backtested trade signal and hesitate to execute.
Switching Strategies Too Often: Some traders abandon their investment objectives too quickly because they read an expert’s advice promoting a different approach. (Example: Switching from trend following to mean reversion because a big-name trader prefers one over the other.)
Doubting Your System in Drawdowns: A systematic trader may feel pressure to override their strategy after hearing a market “guru” claim a crash is imminent—even if their system indicates to stay in the trade. This can create tracking error regret, where traders underperform because they deviate from their planned asset allocations.

How to Overcome Authority Bias in Trading

Want to stop authority bias from interfering with your trades? Here are practical steps:

Use Backtesting to Build Confidence: Backtest your strategy using historical data to see how it performs. This removes doubt and reliance on external voices.
Set Clear Trading Rules (And Follow Them!): Your system should define entry, exit, asset allocations, and risk management rules. No outside opinion should override your system’s signals.
Limit Financial News Consumption: Excessive exposure to expert opinions creates noise. Check your system’s signals—not what the talking heads on TV are saying.
Hold Yourself Accountable: Consider having a trading accountability partner to keep you on track and prevent irrational decisions.

Review Your Trades Regularly: Keep a journal tracking any time you are tempted to override your system due to expert influence. Over time, you’ll strengthen your discipline.

Frequently Asked Questions About Authority Bias in Trading

How do I know if I’m being influenced by authority bias?

You’ve been influenced if you ever change a trade based on an expert’s opinion (without checking your system’s rules). Look for times when you doubted your system because of external advice.

Isn’t it smart to listen to experienced traders?

It’s fine to learn from others, but never blindly follow. Many experts have different goals, risk tolerances, and trading styles than you. Instead, test what they say against your own system.

What should I do when a market guru makes a bold prediction?

Ignore it and stick to your system. Experts can be wrong (and often are). If your system gives a trade signal, take it—even if it contradicts what a guru says.

How can I build more trust in my trading system?

Backtesting, forward testing, and reviewing past results will reinforce your confidence. The more you see your system work, the less likely you’ll feel the need to listen to outside opinions.

Conclusion: Trust Your System

Authority bias in trading can be costly, leading traders to make impulsive, irrational, and unprofitable decisions. The best way to avoid it is by trading with a systematic, backtested approach and resisting the urge to blindly follow market gurus.

Want to master systematic trading and eliminate psychological biases like authority bias?

The Trader Success System will give you the tools, strategies, and confidence to trade profitably without relying on outside opinions.

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Trading Psychology and Psychological Bias Articles

To dive deeper into how other psychological biases affect your trading psychology and decisions as well as practical ways to overcome them, explore the articles below. For a comprehensive guide on mastering your mindset and building a resilient psychology, visit our Trading Psychology page.

Adrian Reid Founder and CEO

Adrian is a full-time private trader based in Australia and also the Founder and Trading Coach at Enlightened Stock Trading, which focuses on educating and supporting traders on their journey to profitable systems trading. Following his successful adoption of systematic trading which generated him hundreds of thousands of dollars a year using just 30 minutes a day to manage his system trading workflow, Adrian made the easy decision to leave his professional work in the corporate world in 2012. Adrian trades long/short across US, Australian and international stock markets and the cryptocurrency markets. His trading systems are now fully automated and have consistently outperformed international share markets with dramatically reduced risk over the past 20+ years. Adrian focuses on building portfolios of profitable, stable and robust long term trading systems to beat market returns with high risk adjusted returns. Adrian teaches traders from all over the world how to get profitable, confident and consistent by trading systematically and backtesting their own trading systems. He helps profitable traders grow and smooth returns by implementing a portfolio of trading systems to make money from different markets and market conditions.

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Break Free from Authority Bias in Trading & Make Independent Decisions