Confirmation Bias

Confirmation Bias

Confirmation Bias 150 150 Michael Bayley

We would all like to think that we make judgements and decisions in an objective and logical manner. But do we?

The third article in Viridian’s ‘Equation for an Optimal Life’ series focuses on another behavioural bias that impacts investors – Confirmation Bias.

Confirmation Bias is the tendency to actively look for information that reaffirms or is consistent with our existing beliefs. Confirmation Bias can impact how we gather information, but also how we interpret and recall information.

Confirmation Bias is also known as ‘Myside Bias’. Those displaying this bias at the extreme level will only select information that supports their views, ignoring contrary information, or when they interpret ambiguous evidence as supporting their existing attitudes. For emotionally charged issues, and for deeply entrenched beliefs, the effect is strongest. Though it cannot be eliminated entirely, Confirmation Bias can be managed through education and training in critical thinking skills.

Let’s look at some real-world examples.
Confirmation Bias and the media

Confirmation Bias is heavily present in the ways we seek out and consume media. This occurs when we only consume news, or what appears to be news, that confirms our pre-existing attitudes and beliefs.

Confirmation Bias underpins the diffusion of false news via various digital platforms. And this bias is amplified in our digital age, by filter bubbles and algorithms on social media. Social media algorithms display information to individuals that they are likely to enjoy and agree with, often reducing exposure to opposing views.

Here is an example.

This frequent repetition masquerades as truth – to paraphrase Daniel Kahneman, Thinking, fast and slow.

The economist, John Maynard Keynes, is regularly credited with saying “When the facts change, I change my mind. What do you do, sir?” In fact, the actual source of this quote was not Keynes, but Paul Samuelson, another famous economist. Regardless of who actually said the words, it raises the point, are we able to critically assess ideas that are new to us, and do we change our minds when the facts change? or do we dogmatically stick to something because we have become myopic?

Confirmation Bias can be exhibited when making property decisions
Confirmation Bias can also influence investors

When it comes to investments, Confirmation Bias can affect our ability to make rational choices. Some investors may gather confirming evidence when making investment decisions rather than evaluating all the available information.

Liam is exhibiting Confirmation Bias.

Does this mean investors miss great opportunities to diversify their portfolio? Or perhaps a business owner doesn’t assess a key person or a business risk appropriately because they are seeing only what they want to see.

Managing Confirmation Bias

In both investing and our daily lives, going out of our way to read an article or discuss something we normally would not engage in is a great tool to overcome Confirmation Bias. Taking a step back and assessing where our information has come from and who has a vested interest in providing it to us could also be a useful way of managing this bias.

An advisor can also be a great help in this area. At Viridian, our advisors can empower you to think critically about your decisions and find resources that may challenge your existing beliefs. This diversification of knowledge enables you to make informed financial decisions that will allow you to achieve an optimal life.

Michael Bayley is an Executive Advisor at Viridian Advisory.

This post and some supporting materials may be regarded as general advice. That is, your personal objectives, needs, or financial situations were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice we may have given you, having regard to your own objectives, financial situation and needs before acting on it. Where the information relates to a particular financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product. The material in this post is correct and complete as of the date it was posted. Viridian is not responsible for, and expressly disclaims all liability for, damages of any kind arising out of use, reference to, or reliance on any information contained within this site

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