Cognitive biases in trading: Understanding trading psychology with four case studies

The Long-Term Capital Management (LTCM) case study involves a hedge fund founded by Nobel laureates and finance experts in 1994 to trade global bond markets. Spectacular success in the initial years, the world's top pedigree and sophisticated mathematical models fed to the overconfidence in 1998 bond arbitrage. The symptoms exhibited for overconfidence were high leverage and ignoring warning signs of the trade going wrong.