Why We Are Not Fully Rational
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Trading decisions are made by human beings under uncertainty, time pressure, incomplete information, and financial consequences. This means our decisions are not automatically fully rational, even when we have a logical trading plan.
Sources of Non-Rational Behavior
We may give too much weight to recent events, seek information that confirms an existing belief, dislike losses more strongly than equivalent gains, or become overconfident after a successful period. These tendencies can influence entries, exits, position sizing, and rule-following.
The objective is not to eliminate human emotion. A more realistic goal is to recognize predictable decision biases and design a process that reduces their influence.
Key Terms
Trader psychology, cognitive bias, confirmation bias, loss aversion, overconfidence, decision process.
Knowledge Check
- Why are trading decisions vulnerable to non-rational behavior?
- Name two psychological tendencies that can affect trading.
- What is a realistic goal regarding emotions?