Confirmation Bias

Confirmation Bias means confirming what investors already believe to be true and then filtering out everything else that is deemed to be untrue. This results in ignoring any new information that is not to their liking or is against their previously confirmed viewpoint. This can be harmful from investors’ perspective because they tend to reach a conclusion first and then try to analyze the available information.

How does Confirmation bias work in markets?

Confirmation bias forces investors to hold on to their poor investments for too long. They keep on looking for additional information in order to prove to themselves that they were right in making the choice. This continues until they finally realize their mistake and sell at a loss.

How to overcome Confirmation bias in stock markets?

Investors should conduct their own research rather than go by what people say. Popular wisdom can be harmful in stock markets. Analyzing various possibilities and knowing one’s risk taking ability should be helpful in decision making.