Polls / July 20, 2011

Do you know what the "confirmation bias" is and how it can play a part in investing?

Less than half – or 44% – of respondents to the latest eZonomics online poll know what the “confirmation bias” is and how it can play a part in investing.

I’m looking for proof
The “confirmation bias” is the tendency to seek information that agrees with what we want to hear. The behavioural economics term – known sometimes as the confirmation trap – has many implications for investing. In a guest blog post for ING Direct USA’s We, the Savers, eZonomics wrote how with house prices, buyers might fall into this confirmation bias by selectively interpreting statistics to back up the decision to buy. For shares, bonds or investing in businesses, the bias again might lead us to look for recent financial “wins” while we conveniently look past “losses”.

But I’ll look for contrary opinions too
eZonomics suggests that simply being aware of the confirmation bias is a good first step to combating it. When assessing real estate, for example, try to view the purchase through the fresh eyes of a disinterested observer. Call those friends whom you know will challenge you on your decision – see if your conviction can withstand the pushback. For all investing, consider fully researching the market. Look for information that contradicts expectations, as well as that that supports them.

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