First a quick review: Much of financial theory and how to invest is based upon what the “rational person” would do. Unfortunately, as much as we would like to think so, no one is completely rational. Behavioral finance is the study of irrational situations that people fail to guard against in financial situations.
A fourth behavioral bias to learn is “confirmation” bias. When evaluating any decision to determine if it is the correct decision to make, you should seek information that contradicts your decision, as well as, information that confirms your decision. When the confirmation bias occurs, the person only seeks information that supports their decision and ignores those factors that contradicts their decision.
No matter how strongly you feel that an investment decision is correct, you should seek out information that will proves your decision wrong. Why? The need to get a balanced perspective is very important.
This type of thinking helps to keep you from getting “blindsided” from information you did not evaluate. The confirmation bias is one of the most difficult biases to protect against, as we all have a tendency to only see information that proves us right.
Any investor who has been investing for a short time or a very long time will experience this bias. It is simply a fact of our psychological makeup as humans.
Think clearly and completely about any decision you make and you will likely improve your investment outcomes.
