Confirmation bias is one of the effects of human psychology that is quite interesting and is the driving force in each of us. Understandably, this effect causes people to naturally filter input and only receive confirmation because of their previous beliefs. That belief is automatically saved unconsciously, and sometimes it drives us to make mistakes whenever coming to making decisions.
Financial experts believe that this bias effect can apply to the investment sector. Investors will seek information or an opinion that supports their argument and disregard information contrary to their own. Hence, investors can deflect investment decisions based on their own perceived tendencies.
Characteristics of confirmation bias
In-depth research into the human brain’s confirmation bias shows that we have emotions for dissimilar information. Therefore, with a constant flow of information, our emotional system will stabilize. Imagine again, when you love someone, you will suddenly find that person suddenly brilliant, sparkling, and attractive. On the contrary, when you don’t like them, you will find that they are not interesting at. Because of this bias, investors can make mistakes in choosing the time to buy and sell stocks. The source of this phenomenon is the overconfidence of investors, to explain why prices still rise or fall despite market realities.
Example for confirmation bias in investment
For instant, an investor hears that company A is on the verge of bankruptcy. Based on this information, investors are considering selling all stocks.
When they go online to find the latest news about company A, they catch the words of Bankruptcy. Unintentionally, they only choose the information that confirms the most likely bankruptcy scenario, ignoring the fact that the new company is expected to launch a new product aftermarket research and growth of sales. In this case, instead of holding the stock to make a profitable investment, the investor sold the stock with a significant loss just before the stock turned around and rose higher.
Ways to overcome it
Confirmation bias is a part of everyone, and it guides us through choices in life. It is important to have an identity in order to have understand:
Try looking for information other than what you know
Other, or even conflicting, information will help you see another part of the information. Even meet people with conflicting beliefs and challenge their point of view. From there put it on the list of considerations. It will help keep your thinking from falling into the wrong path.
Avoid asking confirmation questions. Investors should not ask conclusive questions about an investment, and avoid the question of yes no. One of the best approaches is to ask a consultant for additional information about the stock. As more information becomes available, it will be easier to make a better choice than the situation.