How does Confirmation Bias hold you back from making the right investments?

Confirmation Bias

Supposedly, I believe that a particular political party is doing good for the nation. So whenever I come across an article supporting that party, I tend to read it with much more precision than I normally would. However, when an article criticising the party comes up, I simply pass it off or ignore it. 

Why does this happen? A bias known as ‘Confirmation Bias’ occurs, in which an individual favours information which aligns with his/her previously existing beliefs and rejects the information which does not align with his/her beliefs. This bias occurs regardless of whether the information is true or false. 

Correlation to the Finance Industry 

Investors are often a victim to this bias. They might have a one sided view of their decisions, for the basic fact that they may be inadvertently researching upon information that supports their beliefs. This in turn may get them bad investments with no returns. All because of what they have previously heard or read. This phenomenon is usually regarded as a source of overconfidence for investors. 

At other instances, investors might hear rumours about companies in the market. After a half hearted research, in which they look for information aligning with their previously heard rumours, they make decisions. 

It is important to understand that such decisions might be made rashly, resulting in unfavourable investments. 

How can you overcome the bias?

• Research well, and read the articles that do not support your belief too. 
• Try to seek contrary advice so that you are not conformed to your previous decisions. 

Conclusion

It is easy to be a victim to this bias, regardless of the situation. A lot of people practise it without even knowing about it. However, with constant research and practise, and understanding the bias, one can change their habit of conforming.