Confidence fed by the illusory certainty of Hindsight
I don't have much contact with humans, certainly not traders as they tend to be going to work just as I'm coming home. But it occurred to me if I could identify what causes them to fail, I could make sure I don't do the same.
Seems to me to fall into two broad categories each which could be considered the flip side of the other.
Excessive confidence in what you believe you know. Overestimating how much you really understand.
Failure to acknowledge the full extent of your ignorance. Failure to acknowledge the uncertainty of the world you live in and underestimation of the role of chance.
As a cat, my opportunities to trade the financial markets have been somewhat limited. So I know I know nothing. Or I at least start out with the assumption I know nothing. I also know that the good die young and the race is not always given to the swift and that chance determines far more, if not everything, than you can possibly imagine.
The unconscious part of you 'knows' this, but your conscious Ego shuts it out. Which is why you look at charts and 'see' patterns and reasons and rationale. Talking heads opine on why this did this and that did that. None of which bears a shred of critical examination and is all prepared and provided post hoc.
Everyone is an expert in hindsight.
Which is why when you use the patterns you've found in historic events and data going forward, they work less well. Forget data mining and curve fitting, forget even trading for a moment. So desperate is mankind for order he'll paste it anywhere he can. When it works again he'll remember it and cite it as a 'proof'. When it fails, it'll be quietly forgotten.
You fool yourselves into believing you know with a credible probability what is 'most likely' to happen next. Out of the Universe of possible 'what nexts' you consider a handful at most and then fit what does happen to one of these, though the fit is never that good, for obvious reasons.
Fundamental Analysis/Technical Analysis are about as useful as random chance, but they both provide an entire industry for the willing practitioners of both to satisfy their respective needs and whims.
At the bottom of my litter tray are a few sheets from an old shredded library book which I have painstakingly put together and there's a quote "Some astrological forecasts will turn out to be true, but most of it, time and experience will expose as empty and worthless. The latter part will be forgotten while the former will be carefully entered in people's memories, as is usual with the crowd." - It's from De fundamentis astrologiae certioribus by a cat named Kepler. He was talking about astrology but it struck me as a perfect assessment of the inappropriate level of confidence fed by the illusory certainty of hindsight.