Choice-supportive bias is the tendency to justify past strategic decisions retroactively by exaggerating their benefits and downplaying their flaws. This might look like someone buying an overpriced car and later convincing themselves it was a “great deal” despite better options. This is one of many cognitive biases explored in trading psychology that influence financial decisions and impact trading performance.
This bias is dangerous for experienced traders as well. It leads to holding onto losing trades longer than necessary, rejecting practical strategies, and ignoring evidence that their current approach isn’t working. If you’ve ever found yourself defending a trade simply because you chose it, rather than because it was actually a rational decision, you’ve been influenced by Choice-Supportive Bias.
How Choice-Supportive Bias in Trading Impacts Decision-Making
This bias affects the vast majority of traders in several ways, often without them realizing it:
- Holding Losing Stocks Too Long: Traders refuse to exit bad trades because doing so would mean admitting they made a mistake, demonstrating the Cost Fallacy.
- Ignoring System Failures: A trader may continue using a poor-performing strategy because they’ve invested time learning it, leading to suboptimal decisions.
- Overvaluing Past Wins: Traders may convince themselves that their discretionary trade was based on skill rather than luck, leading them to repeat the same approach, even when historical data analysis suggests it was flawed.
- Memory Distortion: Traders vividly remember successful trades but downplay or ignore their financial losses, making them believe their approach is better than it really is.
A recent study on high-net-worth investors found that memory distortion plays a big role in behavioral finance biases in trading. Memory distortion often reinforces past choices regardless of their actual success. This psychological tendency causes traders to misremember poor investment decisions as more favorable than they were, leading them to repeat the same strategies despite mixed or negative outcomes. By unconsciously adjusting their recollections, they create a self-justifying loop that can hinder future performance and trading outcomes.
The Role of Trading Systems in Mitigating Choice-Supportive Bias
One of the most effective ways to combat this bias is Systematic Trading. A trading system eliminates emotional reactions and replaces them with clear, rule-based criteria.
- Rules Define Entries & Exits: You follow objective signals rather than gut instincts, reducing impulsive decisions.
- Backtesting Provides Proof: You don’t have to “hope” a strategy works—you already know it does through historical data analysis.
- No Room for Justification: If a trade fails, you can evaluate it based on predefined rules instead of making excuses.
By using a systematic approach, you remove ego and emotions from the equation, significantly reducing the impact of Choice-Supportive Bias and other behavioral biases, such as Loss Aversion Bias and Herding Behavior.
Challenges Systematic Traders Face with Choice-Supportive Bias
Even Systematic Traders aren’t immune to this bias. Some common challenges include:
- Cherry-Picking Backtest Data: Ignoring results that don’t fit their expectations, leading to irrational decisions.
- Tweaking Rules After Losses: Adjusting a trading strategy based on emotion rather than data.
- Sticking with a System That No Longer Works: Justifying continued use of a declining system instead of re-evaluating based on market outcomes.
Actionable Tips for Overcoming Choice-Supportive Bias in Trading
To avoid this bias and trade more effectively, apply these techniques:
- Keep a Trading Journal: Log every trade with the reason for entering and exiting, and review trades objectively to identify patterns in your informed decision-making process.
- Use Backtesting to Validate Strategies: Don’t rely on gut feelings—test and refine your system with historical data analysis before committing real money.
- Set and follow Strict Trading Rules. Establish clear entry, exit, and risk management rules to eliminate poor decision-making.
- Seek External Accountability: Join a trading mentorship program or find an accountability partner to keep you in check.
- Regularly Re-Evaluate Your System: Markets evolve, so reviewing your trading strategy periodically will ensure it remains effective and adapts to future trades.
Frequently Asked Questions About Choice-Supportive Bias in Trading
Why do traders fall into the trap of Choice-Supportive Bias?
Traders become emotionally attached to their informed decisions. Accepting that a past trade or strategy was a mistake can be uncomfortable, leading them to unconsciously justify their choices.
How can I tell if I’m suffering from Choice-Supportive Bias?
If you frequently justify bad habits in trading or resist changing your trading strategy despite consistent losses, you’re likely affected by this bias.
Can systematic traders completely avoid this bias?
While systematic trading reduces the impact of Choice-Supportive Bias, it doesn’t eliminate it entirely. Traders must still actively review performance, seek feedback, and remain objective.
Does this bias affect professional traders, too?
Absolutely. Even hedge fund managers and institutional traders are susceptible, though they mitigate it by relying on data-driven decisions and fundamental analysis.
What’s the fastest way to overcome Choice-Supportive Bias?
Commit to objective, rule-based trading, maintain a trading journal, and hold yourself accountable through mentorship and continuous learning.
Conclusion
Choice-Supportive Bias is a silent saboteur in trading. It keeps traders stuck in ineffective strategies, holding onto bad trades and refusing to adapt. But with Systematic Trading, Algorithmic Trading, and accountability, you can break free from this psychological trap.
The Trader Success System is your answer if you’re serious about mastering trading psychology and eliminating behavioral finance biases. This program is designed to help you develop 100% confidence in a portfolio of rational strategies so you never second-guess yourself again. To learn more about how our program can help you overcome psychological biases and achieve successful outcomes, apply and join The Trader Success System here.
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.
- Action Bias in Trading
- Ambiguity Aversion in Trading
- Anchoring And Adjustment in Trading
- Anchoring Bias in Trading
- Authority Bias in Trading
- Availability Heuristic in Trading
- Bandwagon Effect in Trading
- Bias Blind Spot in Trading
- Choice-Supportive Bias in Trading
- Commitment And Consistency Bias in Trading
- Confirmation Bias in Trading
- Conservatism Bias in Trading
- Contrast Effect in Trading
- Decoy Effect in Trading
- Disposability Effect in Trading
- Disposition Effect in Trading
- Dunning-Kruger Effect in Trading
- Endowment Effect in Trading
- Escalation Of Commitment in Trading
- Familiarity Bias in Trading
- Framing Effect in Trading
- Gambler's Fallacy in Trading
- Halo Effect in Trading
- Herd Mentality in Trading
- Hindsight Bias in Trading
- House Money Effect in Trading
- Hyperbolic Discounting in Trading
- Information Bias in Trading
- Loss Aversion in Trading
- Money Illusion in Trading
- Narrative Fallacy in Trading
- Neglect Of Probability in Trading
- Normalcy Bias in Trading
- Optimism Bias in Trading
- Ostrich Effect in Trading
- Outcome Bias in Trading
- Overconfidence Bias in Trading
- Paralysis By Analysis in Trading
- Pessimism Bias in Trading
- Recency Bias in Trading
- Regret Aversion in Trading
- Representativeness Heuristic in Trading
- Salience Bias in Trading
- Selective Perception in Trading
- Self-Attribution Bias in Trading
- Status Quo Bias in Trading
- Sunk Cost Fallacy in Trading
- Survivorship Bias in Trading
- Trading Psychology in Trading
- Zero-Risk Bias in Trading
