How to Not Succumb To Confirmation Bias While Investing

Posted on January 12, 2018 | By Manager confirmation-while-investing

The human brain is more similar to a programmed software than we admit it to be. There are certain habits that all of us are guilty of having, and in most cases, these habits affect all of our decisions in a similar fashion.

One such habit is the “Confirmation Bias”. If you’re unsure about what it means and hence assume that you probably don’t have it, let me assure you that you are probably wrong.

The confirmation bias is something most of us suffer from. It is the tendency to look for proof that supports our beliefs, and ignore or disbelief those which go against our ideas. This bias affects almost every decision we make, no matter if we acknowledge it or not.

Starting from choosing the best cereal to buying electronics from a brand, we tend to stick to the companies that we believe to be the best. A prime example would be my belief in buying Apple products, which leads me to continuously look for reasons to validate why it is the best brand for smartphones, while ignoring anything negative I hear.

As I said, all of us are affected by confirmation bias to some extent.

However, when confirmation bias starts to affect our decisions regarding our investments, it is something to worry about. If you invest in stock exchange business, continuing to hold on to a declining share just because you “believe” its price will increase since it did in the past, you are being controlled by your confirmation bias.

You might even go as far as discussing the matter with someone who has no idea about it and ultimately convince them to agree with you, or, talk to a person who is directly related to the falling company who will undoubtedly speak in favour of it, therefore validating your own bad decision to yourself.

If you have a financial adviser who supports such and all other decisions of yours without a second question, it’s time you find yourself a better one.

Therefore, the first step to avoid confirmation bias is to acknowledge it. The moment you realize that your decisions are being driven by solely your perception towards an investment, and not by facts, you will be able to open up your mind to actually consider the truth.

There are a few more things you could do to keep the effect of confirmation bias to a minimum (as it’s nearly impossible to get rid of it!):

Analyze ALL facts with equal strictness

A common mistake that most of us make is that we do not give equal importance to all the facts present in front of us.

For example, in many circumstances, I have made a choice to invest in a stock just because I had not invested in some time and hence I assumed I have to invest now by hook or crook.

Therefore I invested in the first share that seemed profitable to me, without judging or analyzing the statistics and real empirical values of the share at that current time or predicting how they might change. Consequently, I ended up with a loss.

Find someone to argue with you

As human beings, we tend to interact more with people whose opinions are similar to ours. While this might bring peace in the household, being around people who agree with what you say all the time can severely narrow your thought process, which ultimately leads to more confirmation bias.

From the people you trust, find someone who is logical and intuitive, and make them argue against your decision. Ask them to find out points against your choice, or facts that support a decision different from yours.

However, make sure you actually pay attention to what they have to say and consider it thoroughly instead of arguing back to prove your point.

Make sure you are honest with yourself

Before starting to research about whether you should invest in something or sell something, ask yourself, do you really want to?

If you have your answer, talk to people about what you are considering! Don’t ask them leading questions that they will just nod to, engage them in active conversation. And please, make sure you are actually listening.