As emotional creatures, human beings are prone to a multitude of behavioral biases that can help them in daily life, but hurt them badly in the investing world. Even the best investors can slip up and let these biases lead them astray, so today we’ll take a look at an article written earlier this year on “confirmation bias” by Kiplinger’s Bob Frick.
Confirmation bias, Frick writes, is “the human tendency not only to hear what we want to hear but also to seek out those with similar opinions. This confirmation bias is a key component of investor overconfidence, which leads us into all kinds of bad behavior, including trading too often and buying risky investments.”
Frick says confirmation bias “plays out neatly on message boards” in today’s world, citing two studies that have shown that when faced with higher stock volatility, investors are more likely to seek out those who share there opinions. The study’s authors examined message board activity as part of their work, Frick says. One of them, Bin Gu, a professor of information management at the University of Texas at Austin and a coauthor of the studies, told Frick that in times of uncertainty, investors will seek out those of like mind because “it makes them feel better”. Adds Gu, “The degree to which people succumb to confirmation bias could be a measure of how irrational the market is.”
How can you overcome confirmation bias? Frick has some suggestions: “Base your analysis and opinions on the facts, and ignore others’ opinions that are clearly not fact-based. Test your assumptions with those who hold opposite opinions, especially in times of uncertainty. And stay the heck off message boards and out of chat rooms.”