Investors’ Behavioral Biases: Part IV – Confirmation Bias
It is a principle of good science that all effort must be made to falsify a hypothesis. Only when that attempt has failed can the hypothesis be, at least tentatively, accepted. But humans are not wired that way; we tend to accept evidence that supports an existing point of view and ignore conflicting evidence.
Confirmation bias is stronger for emotional issues. This can be quite extreme where two people or groups with opposing views are presented with identical evidence. Each group will tend to interpret the evidence in a way favorable to their view. Thus laying the groundwork for many a disagreement.
In the investment space this bias is often seen in analysts. They write a favorable report on a company, usually suggesting it is a buy. Then bad news is reported. The analyst will often put a positive spin on the news to avoid conflict with his bullish report.
Confirmation bias is common with investors who hold a stock in the expectation of future gain. Adverse drill results in an explorer, for example, result in comments such as; ‘well there will always be a few dud holes”. The investor is reluctant to accept that their initial assessment was wrong.
It is very difficult for people to look at data or information dispassionately. The best that can be done by most people is to be aware of confirmation bias and try to incorporate that in investment decision making.