Superiority Trap

AAA

DEFINITION of 'Superiority Trap'

A psychological or behavioral trap that leads people to believe that they have superior skill in some areas. The superiority trap can be a dangerous delusion in the stock market, since investors who believe their investment prowess is superior to that of others may end up losing a lot of money. One way of avoiding this trap is through retaining a sense of humility, rather than hubris. An oft-cited example of the superiority trap is the fact that the overwhelming majority of people think they are above-average drivers, which is a contradiction in itself.

INVESTOPEDIA EXPLAINS 'Superiority Trap'

Investors trapped in the superior state of mind have inflated views of themselves. They are overly confident in their capabilities and investments, and they may reject good independent advice, which could lead to errors in their own judgment. The superiority trap may have been the root cause of some of the biggest financial blow-ups in history. A prime example is the collapse of Long-Term Capital Management in the late 1990s. While LTCM’s distinguished Board of Directors included Nobel Prize winners in economics, this brainpower was not enough to avoid a loss of $4.6 billion in less than four months after the Russian financial crisis of 1998.

Another illustration of the superiority trap is that of an investor adding recklessly to a losing position, backed by the assumption that he or she knows better than the market. The investor is optimistic that the market will eventually see the stock’s value proposition and push it higher. But if the stock continues to decline, the investor will eventually have to cut losses and close the position.
 

RELATED TERMS
  1. Hot Hand

    The notion that because one has had a string of successes, he ...
  2. House Money Effect

    The tendency for investors to take more and greater risks when ...
  3. Muppet Bait

    Naive investors who are lured into buying hot stocks or securities ...
  4. Behavioral Finance

    A field of finance that proposes psychology-based theories to ...
  5. Herd Instinct

    A mentality characterized by a lack of individual decision-making ...
  6. Lemming

    The act of an investor following the crowd into an investment, ...
Related Articles
  1. 4 Psychological Traps That Are Killing ...
    Active Trading Fundamentals

    4 Psychological Traps That Are Killing ...

  2. Avoid These Common Investing Psychology ...
    Investing Basics

    Avoid These Common Investing Psychology ...

  3. Follow The Herd In Trading The Capital ...
    Trading Strategies

    Follow The Herd In Trading The Capital ...

  4. Behavioral Bias - Cognitive Vs. Emotional ...
    Investing Basics

    Behavioral Bias - Cognitive Vs. Emotional ...

Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  3. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  4. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  5. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  6. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
Trading Center