When cognitive biases are biased by the atmosphere of the moment, normal judgment is deprived
After forming a position, one can become emotionally volatile over unrealized gains or losses, missing the timing to take profits or cut losses, and fail to judge the market from an objective perspective. This is called a cognitive bias. It is a bias in thinking that every investor experiences.
Most investors have no choice but to make judgments based on the information provided, and cannot necessarily obtain corroboration. Analysts and media such as news tend to induce investors' biases and manipulate public opinion.
Near a market bottom, they tilt their thinking toward total pessimism to induce cognitive bias and deceive investors. The same reason applies near a market top, so treat the information as only reference.
So... what should you do if you don’t want to be affected by cognitive biases?
In my case, I kept fundamental factors only as reference, honestly accepted chart-based technical analysis, read buy/sell signals, and traded mechanically. This helped me trade without being influenced by cognitive biases.
Charts are honest; they embody everything, but they do not predict the future. They simply express past events with candlesticks.
Strangely, even when looking at the same chart, ten people get ten different answers. Some want to buy, some want to sell, some want to wait; responses vary.
Why is that?
Probably because each investor has different perspectives, time frames, and values, so some feel the market will rise while others feel it will fall.
In other words, the more you are suffering from unrealized losses, the more you tend to set up charts that are favorable to you. If that happens, you will cling to indicators that suggest you will be saved by changing technicals or time frames. In this way, cognitive bias becomes skewed and normal judgment is taken away.
When cognitive bias is skewed, you shut out information that is not convenient (o^-')b
The way to cope when cognitive bias has skewed and normal judgment is taken away is to perceive things objectively. Few people can view themselves objectively. Moreover, there is no one without cognitive-bias-based bias.
Because the mental wavering is the essence of cognitive bias.
When something inconvenient happens and you feel shaken, your thinking becomes biased to justify yourself, and cognitive bias worsens and progresses.
If you dig a little deeper into cognitive biases, you may understand how to cope. So I organized features of cognitive biases. The more a losing investor loses, the more they believe they are competent due to the Dunning-Kruger effect. If you win big at pachinko, you may attribute it to your skill, and if you lose heavily after thousands of spins, you complain that the pachinko parlor manipulated it—that is the self-serving bias.
Most fundamentals and technicals are based on hypotheses, and regardless of whether the evidence is right or wrong, people overweight coincidences due to confirmation bias. Since you tend to see only what you want to see, your normal judgment is progressively eroded. Why did I hesitate even though a top-signal was lit?
If I had not yielded to greed and had cleanly taken profits, it would have been a huge win. It may have happened as I predicted. This is the characteristic of hindsight bias, bragging after the fact. People are influenced by appearances. When it rises strongly, it becomes total optimism; when it plummets endlessly, it becomes total pessimism.
This is how you unconsciously create the image you want—the halo effect. Investors who display too many indicators on their charts clearly have information bias and are prone to information overload, leading to indecision because they absorb unnecessary information.
New information greatly influences your intuitive image. Depending on the order of information presented to investors, impressions can change dramatically.
Thus, investors’ thinking becomes biased. If you savor the moment of abundant unrealized gains while in bliss, you may be forced to a loss cut by a sudden steep drop, unable to recognize in seconds the reality that one hundred million yen of capital has evaporated before your eyes, and somewhere in your mind you still think it’s a lie. This is the characteristic of normalcy bias.
If an investor turns away from unrealized losses that are beyond expectations, and in some part of their mind believes it’s a lie and escapes reality, even if their initial investment decision lights a sell signal, they may become suspicious that this is a false signal and doubt the reversal, or underestimate a short-term top in a long-term upward trend and delay judgment, ultimately causing unrealized gains to turn into unrealized losses—this is the real danger of normalcy bias.
At this point you cannot judge the current situation objectively... no, you probably don’t want to judge objectively because the situation is unfavorable to you. Anyone dislikes locking in losses. Since you can sometimes survive by holding without cutting, you will start seeking reasons not to cut and reasons to continue holding.
At this point you should recognize that normalcy bias has become skewed.
The way to cope with cognitive biases is to keep fundamental elements as reference, determine clear buy and sell points with technical analysis, and entre honestly. All other situations should be approached with a wait-and-see attitude.
You now understand why cognitive bias erodes normal judgment, right? ヽ(゜◇゜ )ノ
