This is amongst the most common behavioural force that plagues traders and market participants. Loss aversion is the belief that paper (unrealised) losses are less important than actual losses. What this means simply is that traders often view their unrealised losses with less significance than actual losses that they have incurred.

As a result of this action, losing trades are held onto for longer in the hope that they will one day turn around and the losses eventually recouped. The problem with loss aversion is the opportunity cost and the time value of money in the investment is ignored.

People believe that they know more than they actually do! It sounds rather silly however people often overestimate their abilities and hence their ability to make accurate decisions.

To support this observation in the markets is the tendency for individuals to place too much emphasis on anecdotal evidence and small sample sizes. The market consists of both winners and losers, it is often the winners that make their situation known while the losers tend to stay quiet.

This makes the majority of market participants believe that there is a higher number of successful traders than there are losing traders. Illusion of knowledge often masks the fact that people need to build upon skills like they do in any other profession. There are no easy winners in trading. Those that say otherwise are not traders themselves, but merely showmen!

If you are interested in learning more about Behavioural Finance please download and read the various articles and white papers which we have made available.

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What is behavioural economics? How do all market participants behave in the market when faced with limitations and complications? The human element to any financial market cannot be underestimated, human actions in the market can alter our perceptions about traditional economic theory.

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During the late 1990s we saw a speculative bubble in technology stocks. This is an article which describes the possible reasons for a speculative bubble and the impact which all market participants play in fueling the bubble. This article draws direct comparison to the speculative bubble of the late 1990s and behavioural finance.

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The hardest but also the most important lesson in trading is how to handle losses gracefully. Matt Blackman talks about managing the loss and how traders can begin to understand the importance of being able to handle a loss.

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Leaving the trees could have been our first mistake. Our minds are suited for solving problems related to our survival, rather than being optimised for investment decisions. We all make mistakes when we make decisions. Learn more about the illusion of control.

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Recent evidence suggests that investors and experimental subjects exhibit behaviours that are somewhat at odds with the predictions of traditional economic and financial theory. For example, Odean (1998a and 1999) provides evidence that small investors trade "too much", and that while trading, they sell winners and hold losers.

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Here is an interesting observation drawn from the past six months of working with a large group of full-time traders: The most successful of the group never change the displays on their screens. Each morning the same information appears in the same place. The less successful traders, on the other hand, tend to experiment. They will look at different indicators each week, different ways of displaying the data, etc.......