Every day, shortly before nine o’clock in the morning, a man with a red hat stands at a busy traffic light and begins to wave his cap frantically. After five minutes he disappears.

One day, a policeman comes up to him and asks: “Sir! May I ask what you are doing?”

“I’m keeping the giraffes away,” replies the man.

The puzzled policeman looks around and tells him, “But there aren’t any giraffes here.”

“Well, I must be doing a good job, then.” says the man proudly.

You would conclude that the man with the red hat wasn’t in the pink of his mental health. However, is it just a case of misplaced understanding of causation vs correlation? Actually, there is more to it.

The man’s belief, that absence of evidence (giraffes) is a proof of his prowess in controlling giraffe traffic, is the result of a behavioural bias called Illusion of Control. It’s the tendency to believe that we can influence something over which we have absolutely no sway.

So where does this behavioural quirk come from? In millions of years of evolution, Mother Nature has hard-wired this cognitive bias in the human brain to increase the chances of survival in a hunter-gatherer environment. It’s nature’s way to deal with uncertainty.

 

This inability to deal with the unknown creates cognitive stress, and to avoid this stress our brain tries to get rid of uncertainty. Even if it means being wrong. So IOC is a nice trick to get rid of this uncertainty.

Having a sense of control over the future has long been considered a fundamental motive and a highly adaptive trait for humans. Numerous scientific studies have shown that an absence of perceived control leads to depression, pessimism, and withdrawal from challenging situations. In contrast, possessing a general sense of control leads to self-esteem and optimism.

Without any sense of control, it would be difficult to carry out basic tasks. For example, it’s good to have the illusion (confidence) that you would be able to drive back safely from office to home.

Ironically, if we knew everything about the future with certainty, our lives would be drained of emotion. No surprise and pleasure, no joy or thrill. Certainty would certainly (no pun intended) turn our lives mind-numbingly dull. But I am digressing here. We’ll keep that discussion for the philosophy class.

Leonard Mlodinow in his book, The Drunkard’s Walk, writes –

People like to exercise control over their environment, which is why many of the same people who drive a car after consuming half a bottle of scotch will freak out if the airplane they are on experiences minor turbulence. Our desire to control events is not without purpose, for a sense of personal control is integral to our self-concept and sense of self-esteem. In fact, one of the most beneficial things we can do for ourselves is to look for ways to exercise control over our lives – or at least to look for ways that help us feel that we do.

The problem arises when this healthy optimism and need for control is taken too far and used even in situations which are unknowable and marred with uncertainty.

Some researchers even argue that the IOC is actually an overconfidence in one’s predictive abilities. In general, researchers have found that the illusion of control is more likely when following conditions are fulfilled:

• One has early success at a task.
• Many choices are available.
• The task one is undertaking is familiar.
• The amount of information available is high.
• One has more control over the decision process.
• One has a personal stake in the outcome of the choice.

More than almost any other activity except sports or gambling, investing meets all these tests. But let’s first explore some other areas of human affairs where IOC prevails.

Lottery Tickets and Spinning Dice

Beginner’s luck is a common phenomenon among early gamblers. They go to a casino just for fun and try out their ‘luck’. The truth is that the real ‘lucky ones’ are those who lose very early and leave the casino quickly. But randomness ensures that some will win their initial bets and that’s where IOC sets in.

Let’s enter the mind of one such lucky beginner. After having won a couple of bets if he’s asked, “Is this luck?”

“Hell, no, it is the skill. It’s my natural talent. I am a master of the universe,” he tells himself.

In an environment where you have to compete against other gamblers, you need confidence. And in no time confidence turns into overconfidence. Gamblers can become unrealistic; they think they have control, and think risks are not so great because they have figured out the trick. The trick to keeping the giraffes away!

A similar tendency is shown by people who insist on choosing their own numbers while buying lottery tickets, not only that, they are even willing to pay a higher price for lottery ticket if it comes with an option to choose their numbers. Or for that matter, some believe that it’s possible to choreograph the movement of a rolling dice. They tend to concentrate and throw harder for higher numbers, softer for lower numbers. As if it’s not a dice but a cricket ball where a subtle flick of your pinky can make a difference.

It’s amusing that people are more likely to accept a bet on the toss of a coin before it has been tossed, rather than after it has been tossed but the outcome hidden. As if they could influence the spin of the coin in the air!

Rationally speaking, it’s hard to explain why anyone ever buys lottery tickets. But buy them we do, and part of the reason lies with the feel-good factor associated with IOC. We convince ourselves that the randomness of life doesn’t apply to us. Others may be unable to manage their own destinies, but somehow we think we can.

Listen to Master Oogway’s words of wisdom –

 

Click here if you can’t see the video above.

Of course, the root of IOC is another illusion called the illusion of knowledge. Confusing correlation with causation. In Antifragile, Nassim Taleb writes –

When you spend time on the bridge of a ship or in the coxswain’s station with a large compass in front, you can easily develop the impression that the compass is directing the ship rather than merely reflecting its direction.

The illusion of knowledge is the tendency for people to believe that the accuracy of their forecasts increases with more information. In fact, psychologists have found that IOC is stronger when it involves prediction.

Let’s do a thought experiment to see how sensitive most of us are to the illusion of control, consider the following two bets:

• Option 1: I will pick a stock name at random. You will guess whether this stock will go up or down tomorrow. If you’re right, you win 100 rupees; if you’re wrong, you lose 100 rupees.
• Option 2: I will pick a stock name at random. You will guess whether it went up or down yesterday. (You are not allowed to look up the price.) If you’re right, you win 100 rupees; if you’re wrong, you lose 100 rupees.

Which bet do you like better?

In a similar experiment at Stanford University, two-thirds of the participants took the first option. Most of these people were well aware that each bet has identical, 50/50 odds of winning. But the first bet seems more comfortable because it does not make you feel as if the result is out of your hands.

Somehow predicting a past event doesn’t really count as prediction and isn’t that exciting either.

Information generally follows the well-known 80/20 rule: the first 80% of the available information is gathered in the first 20% of the time spent. In spite of that, as shown by numerous studies, increasing information leads to increased overconfidence, rather than increased accuracy, and thus makes the illusion even more real.

IOC In Investing

This bias is also seen in stock investing, when investors, who do a lot of hard work before picking up stocks, believe that their  analysis and knowledge gives them control over the future of stocks they own. This creates an overconfidence bias.

IOC sometimes creates decision paralysis. Some investors, who believe that they should know everything about a business to make a decision, get overwhelmed with the enormity of work required for stock analysis and never really start investing on their own.

This behavioural bias afflicts not just the small investors but professional money managers too. In his book, Think Twice, Michael Mauboussin writes –

…active money management, may be one of the best examples of the illusion of control in the professional world. Researchers have shown that, in aggregate, money managers who actively build portfolios deliver returns lower than the market indexes over time, a finding that every investment firm acknowledges. The reason is pretty straight forward: markets are highly competitive, and money managers charge fees that diminish returns. Markets also have a good dose of randomness, assuring that all investors see good and poor results from time to time. Despite the evidence, active money managers behave as if they can defy the odds and deliver market-beating returns.

In financial community, because of IOC, the analysts tend to feel close to the companies that they cover and hence tend to be overly optimistic about their prospects.

Overcoming IOC

Max Gunther, in his book The Luck Factor, writes –

If you cling to an illusion of control, you open yourself to two kinds of danger. The first danger is that you won’t build defenses against the unknowable bad luck at any hour could snatch control from your grasp. The second is that, when bad luck strikes, you will be too greatly demoralized. You will react in ways that are not useful.

So how do you overcome IOC? The first step is to be aware of it.

When we are in the grasp of an illusion or, for that matter, whenever we have a new idea – instead of searching for ways to prove our ideas wrong, we usually attempt to prove them correct. This is what psychologists also call confirmation bias, which leads to a false sense of understanding and control.

To break free from this illusion, we need to be open to the possibility of being wrong. Even better, assume that your initial hypothesis is wrong and then find evidence to prove that.

Another key is to identify the cases where luck and randomness play a significant role and tread the waters carefully while making decisions.

Conclusion

So we have seen how a fundamental clash between our need to be in control and our inability to recognize randomness leads to this serious cognitive error called the illusion of control.

The famous stoic philosopher Epictetus said –

Happiness and freedom begin with a clear understanding of one principle. Some things are within your control and somethings are not.

Hence the lesson here is that life is slippery no matter how you handle it and absolute control is an illusion.

Bertrand Russell once said –

The trouble with the world is that the stupid are so confident while the intelligent are full of doubt.

I know it feels so counterintuitive that on one hand, we are working hard to learn and become wise and on the other hand we are being asked to be unsure about our knowledge. But that’s the paradox of worldly wisdom.

The first step to acquiring wisdom is to acknowledge our ignorance. Doubt, said the physicist Richard Feynman, is the necessary first step. So you have to learn to double- check your answers, particularly when the evidence seems most confirming, and to ask, “Could I be wrong?”

I’ll leave you with this beautiful quote –

The larger the island of knowledge grows, the longer the shoreline – where knowledge meets ignorance – extends.

Take care and keep learning.