B. Venkatesh

One of my friends thinks that real estate is the only investment we should have. He does not know much about the stock market and does not want to give his money to professional money managers. He strongly believes that investing in a mutual fund would mean giving up control of his investments! His views are not unusual. Behavioural psychologists call it the illusion of control — a belief that we can control outcomes on which we do not have influence over.

My friend suffers from illusion of control. Why? For one, he buys his own properties. So, he thinks he has control! For another, he has not lost money on his investments till now. He, therefore, thinks real estate has zero downside risk. The truth is that he does not have control over how much his properties can fetch if they are sold. In a way, my friend exhibits the same behaviour most gamblers do. Research has shown that gamblers too suffer from such an illusion of control. In one study, people believed that they were better guessers when they guessed a series of coin tosses correctly. They, in fact, believed that their performance would be less accurate if they were distracted!In another study, gamblers were seen to throw the dice harder if they wanted a higher number and softer if they wanted to a lower number.

My friend may, perhaps, never invest in the stock market — directly or through mutual funds. But it does not matter because he has already created enough wealth for himself. But if you have not, and suffer from illusion of control, you really have something to work on.

(The author is based in Toronto, Canada)

© Copyright 2000 - 2009 The Hindu Business Line