Illusion of control is where an individual feels that they can control an outcome in their environment[1], which leads to overconfidence (Phase 1 in the Dunning Krueger Effect[2]). For investors, this leads to high degrees of portfolio concentration, increased trading frequency and more leverage.
The illusion of control is prevalent amongst traders, especially novice traders who believe that whatever simplistic process works ad infinitum. If they survive and develop some tenor in the profession, they tend to use multiple heuristics or develop a more systematic approach, which can be fully autonomous.
As traders develop along the Dunning Krueger Curve, those who survive recognise that there is no control over the situation except their personal reaction function.
Restrictions on bet size/individual weightings, stop loss exits or concentration limits or other such risk management strategies can limit the worst of it, as they hard code risk management into the process but the frequency of trading is only ameliorated through time and pain. A greater appreciation of randomness comes with age.
Not being religious, it’s ironic that one of my favourite quotes comes from the Bible:
“I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happened to them all.”[3]
[1] Langer, E. J. (1975). The illusion of control. Journal of Personality and Social Psychology, 32(2), 311-328.
[2] Please refer to Dunning Krueger Effect.
[3] Ecclesiastes 9.11, Holy Bible. King James Version.