Illusion of control
Believing one can influence or foresee outcomes more than one actually can. In modelling, extra detail makes a forecast feel more accurate without making it so.
Where you will meet it
Illusion of control appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Explain how behavioural biases distort analysts' forecasts and ways to offset them
“The illusion of control makes a more detailed model feel more accurate than it is; the remedy is to focus on the few drivers that matter.”
- Set out the steps by which a fundamental active equity strategy is built
“The common pitfalls are behavioural: confirmation bias, illusion of control, availability bias, overconfidence and becoming attached to holdings.”
- Recognise the behavioural biases that affect asset allocation and propose ways to counter them
“Illusion of control encourages concentrated active bets; the global market portfolio as a baseline counters it.”
- Discuss how behavioural factors shape the decisions of an investment team and propose ways to limit their influence
“Groupthink and conformity suppress dissent, especially when a senior member speaks first; overconfidence and the illusion of control encourage concentrated bets; confirmation bias filters evidence toward existing views; anchoring ties forecasts to earlier numbers; loss aversion and the disposition effect delay selling losers; and herding pulls the team toward consensus positions.”
Practise it
Practise illusion of control until it is automatic: questions that explain every wrong option.
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