Definition
The illusion of control is a psychological trap in which you believe your own skill or choices can change an outcome that is actually decided by chance or luck. Once you fall for it, you feel overconfident that you have everything under control, and you become more likely to make reckless decisions.
Why your own lottery numbers feel luckier
Maybe you've played a board game and thrown the dice as hard as you could, hoping for a high number. When you need a low number, you probably roll them gently with your fingertips. No matter how you change the force of your hand or the angle, you can't control how the dice land. Yet we act this way without even noticing.
You can see a very similar pattern when people buy lottery tickets. Many people skip the computer's random quick pick and agonize over choosing their own numbers. The numbers they picked just feel like they're more likely to hit. But whether you choose or a machine does, your odds of winning the jackpot are exactly the same mathematical odds.
This is the illusion of control: even when something is pure chance and you can't affect the result at all, the simple fact that you did something makes you believe you can change the situation.
The most dangerous trap in the stock market
In financial markets, the illusion of control can lead to much more dangerous losses. Stock prices move because of countless chance events and variables, such as the global economy, exchange rates, and unexpected company news. Still, an investor who stayed up all night analyzing a company and studying complicated charts can easily fall for the illusion that they can predict every move in the market.
When you're brimming with confidence that you have the market in the palm of your hand, you start making reckless choices. You might ignore diversification, which means spreading your money across several assets, and bet everything on one stock. Or you might buy and sell dozens of times a day.
An even bigger problem is how you explain the results. If the stock happens to rise and you make money, you credit your own great skill. If you lose money, you shrug it off as bad luck and never doubt your own analysis.
A little more precisely
To be a little more precise, people fall much deeper into this illusion when they take an active part in the choosing, or when the thing is familiar to them. You can see it in everyday life too. In some countries, including the United States, some elevator door-close buttons and crosswalk buttons are reportedly wired so that they don't actually do anything. Yet just pressing the button yourself gives you a comforting feeling of steering the situation.
This illusion isn't always bad in daily life. Believing you can change your situation can ease worry about the future and give you the energy to keep trying, even when things are hard.
But in investing, where cool judgment matters, it's poison. Focus on what you can control, which is your own study and your investing rules. And accept the randomness and chance of the market, which you can never control. That attitude is where real investing begins.
Common misconceptions
Only beginners who lack knowledge and are naive fall for the illusion of control.
Experts are no exception. In fact, lots of knowledge and past success in a field can create overconfidence that you can control everything. In one study of investment bank traders in London, the people with a stronger illusion of control performed worse.
Where you meet it
When you flip a coin, you try to adjust how high you toss it and how it spins, hoping to get the side you want.
You're sure that a stock you analyzed yourself will never fall, so you put all your savings into that single stock.
In one sentence
The illusion of control is the mistaken belief that you can steer, with your own skill, things that are ruled by luck and chance.