Is Confirmation Bias Affecting Your Investment Strategy?

Sam Pesetsky |

Do you know how you feel about things, even before you know what they are? When you meet someone new, is your opinion of them formed from the first impression? Or when you hear a good argument against your current opinions, is your mind open or closed?

We encounter people and ideas every day, and while many of us like to think we’re open-minded, human nature makes it difficult to discard our preconceived notions. So we may instinctively filter out information that doesn’t support our current beliefs; at least initially. Behavioral psychologists call this selective thought process “confirmation bias.”

Impact on Investing

Because our investment choices are generally guided by our thoughts, confirmation bias could cloud our judgment, potentially affecting our ability to make fully-informed decisions.

For example, take someone listening to a colleague bragging about the latest hot stock. They may feel anxious about missing out and decide to do some research on their own. As they search the internet for validation, their mind may be picturing the possible impact of this stock and how they may be perceived if they don’t get in on the deal. This person may let fear and greed creep into their research process, and it could affect their ability to spot red flags or stick to their investment strategy.

Confirmation bias works subtly inside the minds of people striving to make decisions that bring them close to their goals. Even in people that spend time analyzing the cons as well as the pros of a decision, confirmation bias may give more weight to the pros if there is already a preconception in favor of it. Or, to put it simply, it may cause us to discredit information that doesn’t already align with our beliefs. This is a potentially harmful mindset where finances are concerned.

Overcoming Confirmation Bias

We need to be aware of our biases before we can make a point of dealing with them. However, those same biases may prevent us from taking the necessary steps to avoid them in the future. Imagine that you feel every decision you make at work is wrong as far as your boss is concerned. If you’re surrounded by people that agree with you, you may convince yourself that you’re right and your boss is wrong. This is why some people feel it’s important to include people with different beliefs in their lives; if you’re willing to examine their viewpoints with an open mind.

Overcoming confirmation bias doesn’t necessarily mean abandoning your preconceived opinions; it means recognizing how your bias may lead to making harmful decisions in any aspect of your life.

Striving to be aware of it and recognize that it could cloud your judgment is the first step. When gathering and analyzing information, try to find opinions that don’t conform to your beliefs and aim to understand why. This may involve inviting people that don’t share your opinions to give you their views without arguing yours. Just listen and evaluate. The same can be done by reading articles by people with different views. Trying to work through the thought process rationally without fighting opposing views is a good place to start.

This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2023 Advisor Websites.