Confirmation Bias

Confirmation bias is a psychological phenomenon in which individuals, when searching, interpreting, or retaining information, will display the tendency to naturally favor whatever confirms any of their pre-existing beliefs.

This heuristic may arise in three different ways:

1. Biased Research: where and individual will look, even if unconsciously, for evidence which will support his decisions or proves what he desires to prove

2. Biased Interpretation: where data that confirms the individuals believes will be welcomed without critic, whereas data that refutes it or contests it will not be taken into consideration

3. Biased Recall: simply put, it is selective memory. Individuals will recall the past in a specific way in order to reinforce their beliefs.

Confirmation Bias in Behavioral Finance

Experts have concluded that this bias derives from overconfidence.

As investors do their due diligence, they will look into information which confirms what they already believe in, they will willfully ignore anything that refutes their ideas and disregarding any other contrarian views.

This process compromises their decision-making abilities by skewing their decisions and possibly lead to lower profits.

Moreover, it is understood that the confirmation bias gains traction in one’s mind as it acts as a mechanism which alleviates the individual in terms of stress because it will simply act as a shield, effectively “protecting” him of any conflicting and contradictory ideas.

Confirmation Bias Explained

The confirmation bias was first described by Thucydides. The philosopher and Athenian general wrote in The Peloponnesian War; "... for it is a habit of mankind to entrust to careless hope what they long for, and to use sovereign reason to thrust aside what they do not fancy".