Psychological Traps — 6 Core Biases
Cognitive biases are not character flaws — they are standard equipment of the human brain. The following six hit traders especially hard.
1
❌ Confirmation Bias
We seek information that confirms our existing thesis. Example: Long Tesla, reads only Tesla bull analyses, ignores short reports.
2
❌ Loss Aversion (Kahneman)
Losses hurt ~2× more than equivalent gains feel good. Result: We let losers run ("it'll come back") and take profits too quickly.
3
❌ Anchoring
We anchor to our purchase price rather than fair value. Example: Stock bought at $50, now at $40 → "just want to get back to $50". The market doesn't care about your cost basis.
4
❌ Overconfidence
93% of all US drivers rate their driving skills as "above average". Even more pronounced among traders.
5
❌ Recency Bias
Recent experience dominates judgment. After 3 winning trades: increase position size. After 3 losing trades: fearful, won't open a trade that would actually be ideal.
6
❌ Herding
Trading with the crowd feels safe. Bubble indicator: when your aunt/hairdresser/taxi driver is talking about crypto, we're late.
💡 Deep Dive: Chapter 7 Mindset covers trading psychology in depth — routines, drawdown resilience, emotional management.