What Are the Most Common Cognitive Biases That Affect Traders in Volatile Markets?

In volatile markets, traders are susceptible to a range of cognitive biases. Loss aversion, the tendency to fear losses more than value equivalent gains, can lead to holding losing positions for too long.

The availability heuristic, where people overestimate the importance of information that is easily recalled, can cause an overreaction to recent news. Herd behavior, the impulse to follow the actions of a larger group, can lead to buying at the top and selling at the bottom.

Finally, the overconfidence bias can cause traders to overestimate their abilities and take on excessive risk. These biases, among others, can lead to irrational and often costly decisions in the fast-moving and uncertain environment of a volatile market.