We Only Listen to What We Want to Hear…

Confirmation Bias In Investing

One common bias that investors must overcome is known as confirmation bias. It comes into play after we have researched and analyzed a potential investment and made a decision regarding its relative merit. If our impression is that the investment is worthy of purchase and do so, confirmation bias will cause us to only seek out additional information about the investment that confirms our initial positive opinion. Likewise, we will ignore or downplay any new information that contradicts our initial impression. Confirmation bias also works against us when our first research conclusion is negative. If we initially decide not to make a purchase, we will continue to seek out only information that reinforces the original negative assessment. 

A non-psychologist might say that confirmation bias causes us to “lose our objectivity”. This is essentially true. Admitting a mistake can be very difficult and failure to do so can also be expensive when it comes to our investments. We must maintain an “open mind” and objectively evaluate any new pieces of relevant information. This does not mean we should constantly be changing investments. Rather, we must keep an open mind to all new developments and accept the fact that our world is a dynamic place.  

If you would like to learn more about these and other wise financial planning moves, please contact us through our Level 5 Financial LLC website or via phone at 719-323-1240.  This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.  You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Certified Financial Planner