The Illusion of Control

There’s nothing like a market decline to remind us all of the illusion of control. One of the most prevalent features of our psychology, the illusion happens when people tend to overestimate their ability to control events, leading to a false sense of certainty over what are essentially random outcomes. There are plenty of good examples, here are two of the best:

In the years after world war two, Melanesian islanders began assembling into “cargo cults”. After witnessing both Japanese and Allied forces deliver vast amounts of equipment and supplies to airstrips on their islands, the islanders wanted some cargo for themselves. Clothing, medicine, food, weapons, Jeeps, money and ice were on the list. Cargo was thought to be gifts delivered from their ancestors, so in attempts to continue receiving cargo, the islanders began imitating the same practices they had seen of the wartime soldier-deliverers. They dressed like soldiers, performed parade drills, carved headphones from wood, constructed wooden control towers, waved landing signals while standing on empty runways, and even lit torches to illuminate runways at night. Needless to say, the cargo never arrived.

More recently psychologist Ellen Langer illustrated the illusion of control in an experimental setting. She asked students at Yale University to watch a series of coin flips and predict whether the outcome would be heads or tails. The students were not allowed to watch the actual coin flips, but were told the results each time. What the students weren’t told, however, was that the experiment was rigged. Regardless of the real result, each student was told they got fifteen flips right, and fifteen flips wrong. Langer also arranged so that some students got a string of winning flips, while others got a more mixed bag of right and wrong flips. When Langer later asked the students how well they thought they would guess if the experiment was repeated, the students with strings of correct flips had a higher opinion of their skill. So even in the face of totally random coin flips, our best and brightest suffer from the illusion of control.

Luckily, there’s a solution to avoid this common judgement trap: introspection. Keeping a diary of your decisions, investment or otherwise, and recording the outcomes is shown to be highly valuable in breaking through the illusion of control bias. Only through reviewing our repeated attempts and results do we get a real understanding of the difference between randomness, luck, and true skill. Another curious finding of diaries is that not only do we avoid overestimating control in random situations, but we also gain a better understanding of our own control in situations where we actually do possess it.  

There are some things investors can control, and some things they cannot. The good news is that the important things like how much we decide to save and spend, our expectations, and our ability to earn a healthy long term return are totally within our control. However things like short term market fluctuations, or our ability to predict the specific outcome of this or that event – these are totally outside of our control. The sooner we put the coins down and step off the airstrip, the faster we can get to work on the more beneficial things in life. 


Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on the Growth and Income Portfolios and reducing tax.