Pessimism Bias in Trading: What is it and how to prevent it?

Behavioral Biases are an integral part in the study of Trading Psychology and have a big impact on our Trading Performance, whether trading Forex, Crypto, Stocks, Futures or any other market. The Pessimism Bias is one of the most important biases in Trading and it shapes the way we take our profits. Unfortunately, if being victim of the Pessimism Bias, we oftentimes cut our profits too early and, act against the major trading principles and thereby hurt our performance. In this video, we outline what is the Pessimism Bias, how it affects our Trading Behavior, and what we can do as countermeasures to soften its effect and become better traders.

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00:00 Introduction
01:13 Introduction to Behavioral Biases in Trading
03:05 What is the Pessimism Bias
05:22 Pessimism Bias in Trading
09:07 Countermeasures to the Pessimism Bias
14:48 Closing remarks

#tradingpsychology #daytrading #tradingeducation #forextrading #cryptotrading

So what is the Pessimism Bias? The Pessimism Bias describes the tendency of people to overestimate the likelihood of negative events and at the same time underestimate the likelihood of positive events. As the name already suggests, people tend to be more pessimistic about a positive outcome. What does this mean?
To really understand this, let’s have a look at an example based on an experiment that was actually performed like this. Imagine you will get 10 coin flips, and every time the coin lands on heads, you are given 10 USD. Now, how often do you expect to win? Well, I think it should be pretty clear that based on probability, the answer most of you have in your head is 5. However, the 1500 experiment participants answered with an average of only 3.9! As you can see, the participants overestimated the probability of negative events, showing strong behavior of the Pessimism Bias.
There are very strong interlinkages of this to trading behaviors which can be witnessed with many traders, however before getting into this, let’s understand a bit more about the Pessimism Bias, as it will make those connections to typical trading behaviors even more obvious later on.
The Pessimism Bias exists both on a personal and a societal level, however we are going to focus on the personal level, as this the layer which really influences your trading. Additionally, the Pessimism Bias is both general and situational. What does this mean? The Pessimism Bias may have an accelerated influence on your behavior depending on the situation, or the emotional state in which you are in. I believe it is quite easy to imagine that you may be more pessimistic in case you are in a bad mood anyways already. That may sound a little obvious, but becomes extremely important to remember when we are discussing the impact on the trading behavior.


As always when dealing with cryptocurrencies and trading, please make sure to do your own research and take the required time to process and execute. The information in this video may be outdated.

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