The Narrative Fallacy is our tendency to believe in stories that make sense, even when they lack factual support. We crave patterns and explanations, so we construct narratives to make sense of random events—a mental shortcut often discussed in trading psychology. A...
In this week's Enlightened Stock Trading newsletter we cover: 📈Stock Market Update: What happened in the markets this week ⁉️Scenarios: What could happen next & what to do about it 🧠Trading Psychology: You don't belong here... and the lies we tell ourselves 💰Kelly...
Regret aversion is the tendency to avoid making decisions out of fear that the outcome will lead to regret. It’s why people often hesitate to take action because they'd rather avoid regret than face potential loss. This concept is central to behavioral finance and...
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...
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...
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,"...
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%...
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...
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...
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...