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Confirmation Bias

  April 26,2021

Everything You Need To Know About Confirmation Bias

Have you formed a wrong opinion of someone in your head? In a way that no matter how much good they ever do, you’d keep them at arm’s length, and nothing they do or say would budge your opinion of them?

Humans have a tendency to ignore the facts that challenge their beliefs. They only choose to pay heed to the information that confirms their beliefs.

Philosophers note the fact that humans have a hard time processing information in a rational manner once they have formed an opinion on a matter.

What is Confirmation Bias?

Confirmation bias is the likelihood of an individual or a group of people to process information by looking at only a part of the information, which concurs with their own existing beliefs. People are highly likely to process information to reinforce their own beliefs when the situation is highly relevant to them. Confirmation bias is when a person chooses to see only one side of a situation.

For example, Rahul’s mother believes that wearing his red pair of socks during exams proves to be lucky for Rahul. In which case, if he wears the red pair of socks and he scores well in the exams, she will choose to believe that his red pair of socks led to him scoring well. She won’t see beyond her superstition to think of the fact that he might have scored well because of his hard work. Here, she chose to confirm that her superstition was right and will choose to ignore all the other facts. 

Confirmation Bias and Finance

In the world of finance, there is a concept of confirmation bias, which comes under behavioural finance. In more instances than not, investors tend to look for information that will support their view and belief on the investment and overlook the information that contradicts their investment idea. This leads the investors to make poor judgments in terms of their preference of investments and the buy and sell timing of those investments.

For example, an investor hears a rumour about a company’s share price escalating from a source that they believe is reliable. He researches about the company in a way that confirms the rumours that he heard. Based on these rumours and research, he decides to bulk buy the shares of the said company without consulting his broker. In this scenario, the investor’s opinion is biased, and he might just end up buying shares of a redundant company, which may lead to him incurring a substantial loss.

How to Overcome Confirmation Bias?

Confirmation bias can prove to be very harmful as it affects the individual’s or group’s decision-making skills.Most people have an inherent confirmation bias, which they need to work on, or they might end up taking a wrong investment decision and make a potential loss.

Here are a few ways to overcome confirmation bias:

Maintain a skeptical perspective:The first step that one needs to take in order to overcome confirmation bias is to acknowledge that it exists. An investor, once he has gathered evidence that supports his claims, needs to challenge those views. It is important to reassess these views and make a list of the pros and cons of the investment. It is essential to question and try to prove yourself wrong in order to gain an unbiased opinion. It is vital to be skeptical and maintain a view that the said information is faulty and seek out information from a lot of sources. It is more important to focus on statistics than just circulated information.

Avoid asking questions that confirm their views: Investors need to maintain a neutral view while asking questions about the investment. They shouldn’t ask probing questions that will lead to the confirmation of their own perspective. It would be a lot better if the investor asks generic questions to the broker who will help him decide whether the investment is good or bad with an unbiased conclusion.

Circle back: After acquiring unbiased information about the investment from the broker, it is important to circle back and weigh in all the points and make an informed decision about whether or not to take the investment decision.

It is essential to avoid being susceptible to confirmation bias and start questioning your perspective and research methods. Confirmation bias can be reduced by thinking of alternative scenarios and their consequences.

This blog is purely for educational purpose and not to be treated as an personal advice. Mutual fund investments are subject to market risks, Read all scheme related documents carefully.