I am on curriculum vol 2 p.60. It says choices, task familiarity, competition, and active involvement can all inflate confidence and generate such illusions.
All factors seem very reasonable, except competition. To me it’s even counter intuitive. When competition is fierce, people normally have less confidence because it is more difficult to win.
Why does it result in illusion of control? Any idea?
Generally in finance , and particularly among active managers , there is usually a subtext of control talk in the language they use for communication, that is generated because it is a competitive field . They may pretend or even believe they can exert some control on the outcomes of their actions . They might come to believe that because they have something that other players don’t they can come out ahead. Let’s say they were in a niche situtation and there was no competition at all. They might be more realistic or talk more realistically in this situtation.
But if there is much competition , the fact that they must distinguish themselves from the multitudes to survive can generate hubris and illusion of control.
I am not sure but this is how I tried to understand this… First there is a cost involved in making a move from one manager to another for the client… If the competition is fierce, we can almost assume that each one of them is offering the same products and services. If thats the case, then the manager is most confident about a client not leaving him!
I think the competition referred to here is of the market space of the security/position the manager has potential to display illusion of control. The FMP, knowing the landscape would then induce himself in personally (exhibiting base and sample size neglect) inflating the probabilities of outcomes.
This behavior would assume illusion of control.
For example - I work at Corning Inc. I watch the fibre-optic components actually manufactured on the floor and appreciate the sophistication. I know it is the market leader in the space. I tend to concentrate my position based on just that with out understanding the demand aspect of it. This has contritubted in tech buble to some extent. In this case you may note the base-rate neglect – the demand for the components is based on the demand for a qucker faster communication globally.
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Can you close the loop on the “competitive” aspect in your example? It is not clear if (1) Corning is in a monopoly situtation or (2) it is in a competitive situtaion.
If it is in a monopoly situtation , the example is not relevant to the question that Kelvin raised . i.e. it is not counter-intuitive but actually intuitive . For example Corning may be in a monopoly , believe i is powerful and therefore have an illusion of control over the industry it is in.
If it is in a competitive industry how does that tie to an illusion of control?
Could this be looked at as a potential explanation?
a competitive industry tends to have a few specific competitors. - and usually they are known competitors. You tend to look at only those competitors - and at them as the location of any product improvements, marketing tactics and so on. In that mode - you tend to ignore others who might be up and coming, or “potential” future competitors. the hubris that you are doing everything to handle your immediate competitors gives you a “illusion” that you are in control of the market place, while you might not actually be.
CPK I think you have a good explanation.
If there is competition , and one manager is making gains , it may lead that manager to assume that he possesses some skill that is helping him gain over competition , that he somehow can control the outcomes of his investments ,more so than others , ie. he has illusion of control.