When was the last time you changed your mind? Whether it’s in friendly chats with loved ones or more serious debates, we tend to want to believe that our opinions are consistent and correct.
The field of behavioural insights tells us that we have such a strong desire to be right that it affects the way we process information. It’s called confirmation bias. This bias fuels our desire to be right, giving us a higher sense of self-esteem — even though we may be wrong. Find out more and how it may impact your decision making.
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What is confirmation bias?
Confirmation bias is the tendency for people to search for, favor, or interpret information which confirms their existing beliefs. On the flip side, confirmation bias also involves a tendency to dismiss information which challenges these existing beliefs.
Confirmation bias is one of the most deeply engrained behavioural biases. This is because we tend to want our beliefs to be consistent and correct. Confirmation bias helps us accomplish this. It also simplifies information processing, which saves us time and effort.
What does confirmation bias look like?
Confirmation bias can affect both individuals and groups. Here are a few examples:
- Social media algorithms – Tech companies use confirmation bias to increase user engagement on their platforms. Algorithms collect data to understand what content people are drawn to, and then continually offer them similar content — to feed their confirmation bias.
- Relationships –Confirmation bias makes people more likely to choose friends or partners who have similar views, opinions, and beliefs. Over time, we find ourselves within groups of people who share the same views on most issues, limiting our diversity of thought.
- Personal opinions –When thinking about political, social, or economic issues, people tend to place greater emphasis on news stories or data that confirms their existing beliefs. And they scroll past news stories that are opposed to their beliefs.
Confirmation bias is one of the most difficult biases to recognize in yourself. Our desire to be consistent and correct — whether in political views or what we read on social media — pushes us to pay more attention to information that confirms our beliefs.
Our individual behaviours are prone to bias. That can make financial decisions challenging. Try our behavioural bias checker to understand how biases might be affecting your financial decision making.
How does confirmation bias affect your financial decisions?
Confirmation bias primarily affects your investment decisions. It can lead to:
- Missed opportunities – Confirmation bias can push investors to stick with what they know and bemuch less open to different and unfamiliar investment strategies, even though they may suit the investor’s situation(i.e., taking on more risk when an investor is young).
- Riskier investing – Some investors might become focused on a small number of assets and convince themselves that these assets will make them wealthy. In the process, they neglect to properly diversify, making their portfolio riskier than it needs to be.
- Following the herd– People susceptible to confirmation bias are more likely to invest in the latest hot stock when everyone else is doing it. The fact that others are doing it is information which confirms the person’s initial belief that they should buy the stock. Learn more about the herd effect.
When it comes to investing for your future, and the future of your loved ones, confirmation bias can pose problems. Although you may be convinced that you are right, it may be better to err on the side of humility.
How can you protect yourself from confirmation bias?
There are a few strategies you can use to combat the effect of confirmation bias on your investing decisions, including:
- Be a contrarian – When you become convinced about a potential investment, take some time to consider why it could be a bad investment. Make a list of all of the risks, argue against your initial stance, and have someone you trust assess your thinking (i.e., a registered financial advisor).
- Revisit past mistakes – Chances are that you have been convinced of something in the past but were wrong (i.e., the outcome of a sports game). When you feel certain of an investment, revisit your past mistakes to remind yourself that you have been wrong before — and can be wrong again.
- Practice changing your mind – While difficult for most people, changing your mind is something you can get better at over time. By intentionally choosing to change your mind on certain issues — even in small ways — you can limit the effect of confirmation bias.
Taken together, these strategies can protect you from the harm of confirmation bias and help you build a more diversified and suitable investment portfolio. Also, a financial professional can assist you with your investment decisions.
Learn more about other behavioural biases which might be impacting your financial decisions in ways you may not realize.
Summary
Confirmation bias may be the most common behavioural bias. Here’s how it works:
- Confirmation bias occurs when people search for, favor, or interpret information that confirms their existing beliefs, while also dismissing information contrary to those beliefs.
- This bias will show up in many areas of your life and poses a significant risk to your investing decisions and outcomes.
- You can combat the effects of confirmation bias by being a contrarian, reminding yourself of past mistakes, and practicing the art of changing your mind.
