As a trader, every time you make a trade, your brain goes through a decision making process to determine whether or not you should make the trade.
The brain is an extremely complex piece of machinery, but it’s far from error-free. It’s a creature of habit. And while habits can be good for a lot of things, bad thinking habits can be silently destructive.
When the brain’s decision making processes are flawed, it leads to systematic errors in decision making, which are called biases.
Cognitive biases are very common and often go unnoticed, until they are brought to the conscious attention. From there, you can actively recognise and work on these biases, making you a better trader.
Because of the complex nature of the brain, there are too many biases that people can suffer from, but I wanted to write about a few which I think are really common in trading and also about how to avoid them.
Availability bias is when someone places a higher amount of importance on a piece of information that is more easily recalled.
For example, lets say there are two players who both hit a score of 350. Player A gets it on a gold day whereas player B hits it on a bronze. Player A’s score becomes a bigger event in the mind of traders. Everyone is paying attention to gold days, more people are talking about it.
They have both done the same thing, just one different days. So why is it that traders will likely see player A as a better hold than player B, assuming everything else is equal?
Its because of availability bias. A trader who’s looking for a player with a potential for high PB will immediately think of player A, whereas they might have forgot about player B. Player A’s big score was more memorable for traders, so it’s much more easily recalled in their minds. This will give player A a significant advantage in a traders mind when they are deciding which player to buy.
Players who are often talked about will be affected by this a lot. The more a trader hears about a player being a good buy = The more readily they can recall them as a potential buy = The more likely they will buy the player.
Recency bias is similar to availability bias and is probably an example of it. Essentially it is a bias where people tend to place greater value on more recent events compared to historical events.
Both of these biases need to be consciously recognised. Do the numbers say he’s the player you should buy? Or does he just easily come into mind as a good hold?
Thorough research should help offset them as well. With recency bias make sure you are accounting for data from a while back as well as recent data.
Law of small numbers bias
This is one that I’ve been falling victim to a lot recently, and it will have been catching a lot of traders out as well, being the start of the season.
The bias is to do with drawing conclusions from sample sizes that are too small to draw accurate conclusions from. While there is a chance that the small sample size is representative of the players ability, there are far too many factors which can affect a small number of games.
If you only have 7 matches to base your research on, you could be drawing conclusions form an incredible run of form which the player may not ever replicate in his career. Even one great match can considerably skew average values when you have a small data set. Despite how the saying goes, numbers can lie.
In order to combat this, I’ve decided to limit my trading based on numbers for the 20/21 season until we have a few more games (around 15). It doesn’t mean that I’m not going to do any trading at all based on these numbers. It means that I’m going to be very aware of how easily these numbers can be skewed.
Conversely, it’s important to be able to spot trends before others. This will sometimes mean that you’ll have to make decisions based on these small sample sizes.
This can be fine as long as you’re not making these calls on only the numbers. If you’ve watched the games and spotted something tactically which you think gave the player the edge, then that’s fine. If you think it’s worth it, take the risk.
As humans we are, by nature, imperfect. This means that your trading will be imperfect. It’s a gradual journey towards becoming a better trader and it includes identifying where you make mistakes and working on them.
This post was meant to give you an introduction to a few common biases which traders may fall victim to. Start by looking at the one(s) that you most commonly fall victim to and work and it. Before you know it, you’ll be a much better trader than when you started.