What is confirmation bias?
Confirmation bias means that once an idea has formed in our mind, we look for, remember and believe the information that supports it far more. When evidence against it appears, we set it aside as “an exception”, “a rumour” or “they don’t get it”. This is not deliberate lying; the mind simply works this way on its own.
The danger in investing is that after a decision we stop asking questions and only collect proof. So a wrong idea feels more “certain” the longer it lasts, even though the real evidence may have been saying the opposite.
Say Rafi buys shares in a company because a friend said “this will go up a lot”. After that, in Facebook groups he reads only the posts praising that share. When news comes that the company’s profit has fallen, he thinks “that’s temporary”. Six months later his belief is stronger than ever, yet he has not actually checked anything new about the company. The story is made up.
Why it matters to an investor
- Holding on to a bad investment: if you ignore the bad news, an investment that is getting weaker still feels “fine”.
- Believing rumours: a rumour that matches our hopes feels true without being checked.
- Too much confidence: seeing only supporting evidence makes your view feel more certain than it is, so you take more risk.
- Falling for scams: fraudsters say exactly what people want to hear, and confirmation bias does the rest.
What research has found
In 1960 the British psychologist Peter Wason ran a simple test. Participants were told that “2-4-6” follows a secret rule, and they had to find it by proposing new sets of three numbers. Many assumed the rule was “goes up by two” or “even numbers”, and only tested numbers that fitted their guess (8-10-12). The real rule was simpler: any three rising numbers. Very few tried numbers that could have proved their own idea wrong.
Studies of investors find the same thing. A 2013 study of 502 investors on a large South Korean stock message board found that they valued posts matching their own beliefs more highly. Those with a stronger tendency were more overconfident, traded more often and expected higher market returns than was justified.
Why it is stronger today
Social media and YouTube show us more of what we have liked before. Watch a few videos about a share, a coin or a scheme and more of the same keeps coming. It feels like “everyone is saying the same thing”, when really we have walked into an echo chamber of our own making.
- In groups where everyone agrees, the counter-arguments hardly ever reach you.
- The mind is most reluctant to read bad news about something you have already put money into.
A few ways to test your own thinking
- Before buying, write down why, and what would show you that your idea was wrong.
- Deliberately look for the best argument against your view. If you can’t explain it well, you don’t yet fully understand the matter.
- Give facts more weight than opinions: the company’s published reports, regulators’ announcements, the numbers.
- Ask someone who disagrees with you, and hear them out to the end.
Common mistakes
- Only reading the news and watching the videos that praise the share or scheme you already own.
- Always dismissing bad news as “temporary” or “a conspiracy”.
- Treating the fact that many people say the same thing as proof.
- Never deciding, before buying, what would make you change your mind.
Finding evidence for your idea is easy; an investor’s real job is to look for whether it could be wrong.