Author: Brent Lemieux CFA® CPA
Your biases can have extremely large, negative impacts on your portfolio. One of the most pernicious biases is confirmation bias. The confirmation bias is the tendency to seek out and favor information that confirms what we already believe, while ignoring the rest. We do this all the time without knowing it! This tendency can wreak havoc on our personal finances. Luckily, there are proven methods we can use to combat it.
Confirmation bias is easily noticed in the political sphere. For example, how often do you or people you know read arguments against a position you believe in with an open mind? If you’re like most people, the answer is probably not very often. I know I don’t do this very often! You may be wondering what this has to do with your finances. This may be bad for our country, but does it negatively affect our wallets? Yes, confirmation bias creeps into our investment and saving decisions as well.
Investors typically seek out information that confirms what they already believe. For example, let’s say John believes that a company’s stock is going to increase dramatically. He will likely look for and favor articles and opinions that agree with him. This can be extremely problematic. He will likely be very overconfident about the future performance of the specific stock, and may invest too much of his retirement portfolio in the investment. Don’t be so quick to judge John. We are prone to make the same type of mistakes if we don’t make a constant, conscious effort to override our instincts!
What can we do to combat confirmation bias?
Yes, it is possible to overcome this bias. All we need to do is seek out opinions and research that draw conclusions that are different than our own AND process that information with an open mind. This is a very simple process, but not easy.
- Plous, Scott (1993). The Psychology of Judgment and Decision Making. p. 233.
This blog is provided by Windward Private Wealth Management Inc. (“Windward” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. No portion of this blog is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in the individual blog posts will be derived from sources that Windward believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.
Windward is an SEC registered investment adviser. The Firm may only provide services in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about Windward’ registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.