Simplification Error

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Every day a huge stream of information collapses on us. News of different importance and crux captures us completely and often forces us to make certain decisions automatically.

As Robert Cialdini rightly observes in his book “Psychology of Persuasion”: “In order to save time, we sometimes should refuse to process […] the information in full and make decisions automatically […], taking into account only one of its elements”.

Heuristics is based on the principle of automatism. It is a way to reduce information processing, which we have already mentioned of in one of our previous articles. This is what Thomas Oberlechner wrote about this feature in his book “Psychology of the Forex market: “Traders do not process information in a completely rational way, which is described by the traditional economy. For their decisions, they need to reduce and simplify the amount of information around them.

To do this, they use psychological methods of reduction and simplifying empirical rules that help them process market information quickly and competently.”

But sometimes the competence of information processing may be questioned. It happens that the driver, who has been traveling for several years without accidents, suddenly starts thinking that he or she can do everything. Similarly, traders who have worked with financial instruments for a rather short time, for some reason, begin to believe that they already understand enough in the market to make faster (“automatic”) decisions.

Moreover, sometimes people do not even try to consider an alternative to the taken decision. Oberlechner quotes one of them: “Most of my decisions are based on quite a bit of information, feelings and fearlessness. Let’s give an example. We saw that the yen was moving pretty well, we saw a problem in the banking system, the unemployment is growing rapidly, and one could see that something was to happen with the yen. You should choose the currency which it is most interesting to trade, that’s all. Sometimes you have too much information, just add some logic and go ahead.”

Taking into consideration the statistics that most traders, sadly, lose their money, we recommend to look once again at the decisions that are made in the process of trading. And to evaluate them from an alternative point of view, whether they were too simplified and automated? Isn’t it necessary to find an additional confirmation that your decisions are accurate?

Of course, there are too many doubts in trading, but, in our opinion, it is often better not to do anything at all than to do something in a slipshod way.


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