Why Confirmation Bias Is a Problem

This is a three-part series on Confirmation Bias. If you are new here, welcome! You can read part one here.

Now on to part two.

Pretend you’ve just made a tough decision. In the morning, you wake up and there are two emails in your inbox. One has the subject line “10 pieces of evidence that AGREE with what you’ve decided.” The other says “10 pieces of evidence that DISAGREE with your decision.”

$10 says I can guess which email you’re going to open, and which one you’re going to delete.

If you’re like me, you tend to make decisions first and do “research” second. And your “research” consists of summarily dismissing anything that disagrees with you, and instead gathering evidence that supports the decision you’ve already made.

Of course, this isn’t research at all. It’s confirmation bias in action.

Confirmation bias causes all kinds of problems in our financial lives, but let’s just focus on investing. Imagine the following scenario:

One day you’re out on a bike ride with your friend Bill. Bill tells you he’s selling everything and buying gold… because, you know, #apocalypse. This gets you worried. So you go home and start reading about the coming end times. Suddenly you find yourself selling out of a beautifully designed portfolio, which was built specifically to give you the highest likelihood of reaching your goals, based solely on something you learned on a bike ride.

And then… tomorrow happens.

Look, the point here is not to critique whether or not gold is a good investment. Maybe it is. Maybe it isn’t.

The point is that we all form hunches. There’s nothing wrong with that. But there is something wrong with not remaining open to the possibility that your hunch might be wrong.

The reason this is a problem is because confirmation bias is one of the easiest ways I can think of to get burned.

And next week, I’m going to tell you how not to.

This is part two of a three-part series on Confirmation Bias. Read part three of the Confirmation Bias series here.

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