As I write this article, there are but 5 days to go before the 2009 – 2010 English Premier League season kicks off. As an Arsenal fan, listening to my heart tells me that the glorious Gunners will be lifting the Silverware come May.

My head says something slightly different though my heart still naturally skews my head in believing a top 2 finish is achievable.

I am, without doubt, biased. I have been since I was a kid where Arsenal are concerned and, while there is nothing wrong with that, my objectivity in predicting the fortunes of one (actually both) North London football teams is fatally flawed.

In the world of football, I am obviously not alone but similar biases are all too prevalent in the financial community. Unlike the football fan wearing his team’s shirt however, being biased in the markets is, on the face of it, much harder to spot. Indeed, you may be doing it yourself without even realising it. In psychological circles, there are many studies as to the types of biases that occur and their origins. When you take a step back, I would not be surprised if you recognise yourself in some of the following descriptions – I know I did.

In order to understand much of our behaviour, we need a little lesson in history. The analogy regarding my heart and head can also be termed as ‘instinct’ and ‘logic.’ Psychologists and behaviourists agree that the former predates the latter by thousands of years. Instinct is quick. It is there to stop you from being eaten by a lion or trampled by a herd of wildebeest. If instinct and logic lined up in a running race, logic would still be getting out of the blocks as instinct crossed the finish line – think of me racing Usain Bolt. Ever gone long EUR/USD after a tip? Rushed to buy a stock after reading an anonymous comment on a chatroom board and lived to regret it? That gut, instinctive reaction is what cost you money, logic did not stand a chance.

Instinct and logic are processed in different parts of the brain. After logic has had a chance to process the information, if we come to an alternative conclusion, we can revise our thoughts accordingly. Now that the credit crunch has hit and we all feel a little poorer, countering our gut instinct to go for the model of car that has the diamond encrusted leg massager and quadraphonic satnav system is a pretty simple task for logic to deal with, but for other situations it is not a simple as it seems. Studies suggest that our instinctive conclusions persistently cloud our logical judgement. Indeed, with an instinctive bias set, we very often create what we perceive as a logical argument by using the available data in such a way as to merely confirm our initial thoughts, not to challenge them. This process is called ‘Confirmation Bias.’


This is an excerpt from August 2009 issue of Forex Journal.

 

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