This bias, also known as Confirmation Bias, can best be described according to Investopedia: “Confirmation bias is a term from the field of cognitive psychology that describes how people naturally favor information that confirms their previously existing beliefs. Experts in the field of behavioral finance find that this fundamental principle applies to investors in notable ways. Because investors seek out information that confirms their existing opinions and ignore facts or data that refutes them, they may skew the value of their decisions based on their own cognitive biases. This psychological phenomenon occurs when investors filter out potentially useful facts and opinions that don’t coincide with their preconceived notions.”
We believe that Investopedia makes such good points that we wanted to quote them in greater detail. They go on to say: “Confirmation bias affects perceptions and decision-making in all aspects of life, but it can create particular problems for investors. When researching an investment, they might inadvertently look for or favor information that supports their preconceived notions about the asset or strategy and fail to register or to under-weigh any or data that presents different or contradictory ideas. The result is a one-sided view and a self-reinforcing loop. Confirmation bias can thus cause investors to make poor decisions, whether it’s in their choice of investments or their timing of trades. Confirmation bias helps explain why investors do not always behave rationally and perhaps supports arguments that the market behaves inefficiently. The syndrome is a source of investor overconfidence and helps explain why the bulls tend to remain bullish and the bears tend to remain bearish regardless of what is happening in the market.”
Because Confirmation Bias is so insidious and deceptive, it rears its ugly head in three forms:
• The first comes in the form of Biased Research which relates to making a decision or adopting a view and then seeking information that supports it. This can happen unconsciously, and we would refer to it as Framing.
• The second manner would be via Biased Interpretation where the answers cause discomfort and so are ignored or given little consideration—while confirming evidence is accepted uncritically or at least more readily. We call this Cognitive Dissonance, and oh can it wreak havoc for investors.
• The third and final is known as Biased Recall aka (Hindsight is always 20/20) as people remember things in selective ways, and often that best serves them to back up current beliefs—as opposed to the current beliefs being shaped by truthful memories. In other words, we recall the past in a way that reinforces the present.
As stated in our previous review of Biases, the concept of investor Clarity and seeking Process before Progress® helps eliminate these roadblocks allowing investors to better reach their goals and objectives!
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