Confirmation / Selective Bias – In Search of Supporting-Only Information

Confirmation bias (also called confirmatory/Selective bias) is a tendency of people to favor information that confirms their preexisting beliefs or hypotheses. People display this bias when they gather or remember information selectively, or when they interpret it in a biased way. The effect is stronger for emotionally charged issues and for deeply entrenched beliefs. They also tend to interpret ambiguous evidence as supporting their existing position. Biased search, interpretation and memory have been invoked to explain attitude polarization (when a disagreement becomes more extreme even though the different parties are exposed to the same evidence), belief perseverance (when beliefs persist after the evidence for them is shown to be false), the irrational primacy effect (a greater reliance on information encountered early in a series) and illusory correlation (when people falsely perceive an association between two events or situations).
The problem of selective thinking can be detrimental when dealing with money, both at the time of buying as well as selling. For example, while buying a stock you may have some notions about a certain company and you may therefore think that the stock is not worth buying even when, in reality, the facts and circumstances have changed and warrant a fresh look. This may lead you to missing out an opportunity of profitable investment. As regards selling, suppose you want to sell you car and have decided on a price limit for it. Even when new and better models enter the market, you stick to your price with the result that you let great deals pass by.

Examples of Confirmation Bias

1. For example, an investor may get a news or information about a stock and its potential to move up in the short term. From then on he will be looking for information to prove this point of view, and he may unconsciously or wilfully ignore any news or information against this. Hence, he will collect more such positive supporting information and then even go ahead and invest in that stock.
2. For example, an investor who might have bought a stock which had fallen heavily and sitting on huge losses will also look for positive news and information about the company, just to support his decision to hold on to the investment to sell at a profit in the future. Eventually, the stock may not go up at all and still the investor will search for some good news somewhere to support his decision to hold the stock.

How to overcome Confirmation Bias?

1. Always understand that there cannot be single source of truth in investing
2. Only sound fundamental analysis and critical and contradictory thinking will provide you with proper data to make proper decisions
 

3. Understand you cannot always win the markets
4. Understand your risk taking ability and have proper margin for loss in case it occurs
5. Intentionally look for contradicting information and analyse them
6. Always have margin of safety in your investments and have stop loss in your trades
 
What do you feel for this article ? Do you have more points to add… 

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