Investors' Magical Thinking: The Power of Rituals, Superstitions, and Luck in the Stock Market

This week, the market began looking to Nvidia’s upcoming earnings report as a way to break out of the current growth stagnation: U.S. stocks fell amid rising Treasury yields, high oil prices, and doubts about the sustainability of AI investments, and the Nasdaq lost about 2.1%. Investors and analysts are practically attributing causal power to a single event that it does not possess. This is characteristic of a phenomenon known as magical thinking. Why and how does this happen, is it possible to overcome it, and what does Sigmund Freud have to do with it?

The term “magical thinking” has a long history. As early as 1871, Edward Burnett Taylor—an ethnologist, cultural anthropologist, and scholar of religious rites and ceremonies—wrote that, in human understanding, magic involves the erroneous acceptance of an imagined connection as real.

But it was Sigmund Freud, the father of psychoanalysis, who formulated it as a psychological concept and brought it into common use. In his 1913 work *Totem and Taboo*, he described magical thinking more as the “omnipotence of thoughts”—that is, when a person attributes to his own thoughts and mental acts power over reality, or at the very least, influence over it.

This has manifested itself—and continues to manifest itself—in people through rituals, the observance of superstitions, and belief in gods.

Modern psychology uses the term more broadly: magical thinking is the attribution of a causal relationship to events or actions where no such relationship exists or where it contradicts the laws of nature. Moreover, magical thinking is found not only in people with mental disorders but also in ordinary people.

Investors probably don't often think, "I'm wearing my lucky socks today, so my portfolio is definitely going to grow today." Although there are surely people who do think that way, and they have every right to reason that way.

There are others, for example, who believe that if “this fund manager earned a 200% return, then he has a special understanding of the market.” Or: “He predicted the crisis several times, so he really does know how to predict crises.”

All of this sounds like perfectly logical reasoning, but that is precisely where the trap lies. Predicting a crisis does not in itself mean that human thought can control the market. A crisis is a phenomenon shaped by too many factors and is simply too unpredictable. As a result, we often confuse the quality of the process with control over the outcome.

Uncertainty is unpleasant; it literally makes us feel uncomfortable. It is precisely under such conditions that people seek a subjective sense of security and control. It is precisely under such conditions that rituals, superstitions, and magical thinking emerge. We need and want to believe that there is someone we can look up to—a guru—who will show us that we, too, can succeed. Take, for example, Cathie Wood, now known as the “queen of traders”: her investment fund, the ARK Innovation ETF, rose 152.5% in 2020, compared to 18.4% for the S&P 500, and Wood herself has come to be seen not just as a successful fund manager, but as someone who “sees the future” before the market does.

Or here’s another example: Michael Burry began betting against the U.S. real estate market in 2005 and predicted the well-known mortgage crisis of 2008–2009. This earned him a huge profit. Later, *The Motley Fool* called Michael Burry a “legend” and wrote that, following his prediction of the mortgage crisis, he is “just as accurate today,” citing his past success as an irrefutable argument.

And once again, a single brilliant prediction has led to a belief in humanity’s ability to predict the future. This is exactly how magical thinking can work for an investor—it endows him with a talent he may not actually possess. All these manifestations are, in essence, tools for reassuring people.

The first is extrapolation. When something goes well, we expect the result to be repeated. That’s why we may mistakenly mistake luck for skill, exceptional intelligence, or even insider trading.

Second is the illusion of control. The more we know about an issuer, an industry, or the macroeconomy, the easier it is for us to forget how many factors remain outside our field of vision. The brain automatically filters them out, relying on past statistical observations.

Third, increased risk. If an investor believes they have identified a pattern or trend, they naturally increase their investment or the number of trades. In the heat of the moment, it’s easy to stray from your strategy—if you have one—and take on too much risk.

Fourth, the inability to reevaluate one’s beliefs. We may attribute failure to “the market,” “bad timing,” or a temporary deviation, but we do not necessarily reevaluate our original hypothesis. However, this is less a characteristic of magical thinking and more a feature of human cognitive processes—which, incidentally, fit well within that framework.

Most likely not, rather than yes. Magical thinking is closely linked to cognitive, emotional, and social factors; it is part of our repertoire of cognitive biases. Therefore, it cannot be eliminated as if it were a malfunction. However, it is possible to reduce its influence on investment decisions.

You don't need to convince yourself that you're a rational person to do this. On the contrary. You should start from the assumption that all of us, as human beings, are capable of making mistakes. Therefore, it may be helpful to ask: “What would have to happen for me to admit that my hypothesis is incorrect?” This forces you to define in advance the parameters and initial limitations of your own beliefs.

A meta-analysis of 54 studies involving more than 10,000 participants, published in *Nature Human Behaviour* in 2025, showed that people can learn to counter cognitive biases and magical thinking. Therefore, the investor’s task is more about building a system in which illusions come at a lower cost.

This article was AI-translated and verified by a human editor