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Psychological Traps

In the world of decision-making, our brains can sometimes play tricks on us. We fall into traps like wanting things now instead of later, or only seeing what we want to see. These traps can lead us to make choices that aren't in our best interest. By being aware of them, we can make smarter decisions and avoid falling prey to their influence.

  • Exposure Bias: Consuming news without seeking confirmation of its accuracy can lead to misinformed perceptions.

  • Confirmation Bias: Forming a conclusion first and then rationalizing it, often overlooking contradictory evidence in the process.

  • Trend Chasing: Succumbing to the temptation to extrapolate current trends into the future can often leading to increased risk and potentially quick losses.

  • Intertemporal Discounting: A tendency to value money in the present more than money in the future.

  • Overconfidence: Holding unwavering belief in one's judgments or abilities often resulting in blown-up accounts or significant losses.

  • Loss Aversion: Going to great lengths to avoid losses, sometimes at the expense of potential gains.

  • Gambler's Fallacy: Thinking that a series of events will somehow affect the outcome of the next event.

  • Disposition Effect: The tendency to sell assets that have appreciated in value while holding onto assets that have decreased, often driven by emotional attachment.

  • Instant Gratification: Preferring immediate rewards over long-term benefits, leading to impulsive decision-making or prematurely taking profits.

  • Action Bias: Taking action even in the absence of an edge or strategic rationale, driven by the urge to do something.

  • Euphoria: Experiencing a state of extreme happiness and excitement, often following a series of successes, which can cloud judgment and lead to irrational decisions.

You probably are not a victim of all these traps. However, there are generally one or two that, if acknowledged and efforts are made to avoid, can make a major change in your overall profit/loss curve.

I have accumulated these points over the years from various books, all of which I recommend reading, including 'Trader Mind' by Steve Ward, 'Thinking, Fast and Slow' by Daniel Kahneman, and 'The Art of Thinking Clearly' by Rolf Dobelli.


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