The eureka moment of “That’s what I thought!” can be a reassuring feeling. Everyone likes being proven correct. But that might actually be a sign of a basic human bias that can be bad for, among other things, your portfolio.
Most people seek out information and insight that confirms what they already think – and avoid information that challenges their pre-existing beliefs. Often, even ambiguous evidence is used to support what people already believe.
This is called confirmation bias (or “my-side bias,” or “verification bias”). It shows up in many ways, including in the way we do our research while looking for investment opportunities. For example, an investor may have a firm view that a particular asset is heading higher – and therefore he is drawn towards evidence that confirms that view. But he ignores (or at least plays down the significance of) data that doesn’t support that view. Our brains seek out a way to confirm our beliefs.
Confirmation bias is a defining characteristic of political debate. Those on one side of the political spectrum will almost exclusively focus on information that supports their pre-existing political beliefs. Those on another side will draw almost entirely on sources of news and insight that support their political positions. Both groups will usually ignore evidence supporting the other side.
How can you get around confirmation bias? The first step is to recognize that it exists – and that your brain is programming you to confirm your own biases. Once you realize this, it’s a question of actively seeking out information that goes against what you believe and understand. Find a view that’s contrary to your own and give it due consideration.
You may – actually, you probably will – wind up believing the same thing. But your portfolio may benefit from a conscious effort to address your confirmation bias.