Cognitive Biases Can Slow Our Appreciation of Market Shifts
- Cognitive biases are a patterns where people frequently deviate from rationality - and are very common in trading
- We focus on three biases that commonly build on each other: anchoring, confirmation bias and availability cascade
- Monetary policy themes, cross correlations and risk connections are reviewed with these biases in mind
Having trouble trading in the FX markets? This may be why.
Traders are not robots, which is why the market builds on trends of speculation and sometimes-'irrational' expectations. However, cognitive dissonance can lead the markets to extremes that eventually correct when pricing runs too far askew of the tangible fundamentals. There are a host of 'cognitive biases' (patterns where views deviate from rational views or decision making) that impact market assumptions both for individual traders and the entire 'herd'. In today's Strategy Video, we focus on three in particular that tend to create a cycle of reinforcement - anchoring, confirmation and the availability cascade. We discuss what these biases are along with how they direct market assumptions on popular themes like relatively monetary policy, the relationship between USDCAD and oil, as well as the presumed influence of oil prices on general risk trends.
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