Confirmation Bias

Remember the last time when you saw somebody for the first time and you liked this person immediately?

You didn’t even need to talk to each other and you knew you would get along.

What happen after you had a chat? Most probably you found facts that confirmed your first opinion.

Meeting a new friend is always nice, but are you sure you didn’t fall into the confirmation bias?

The confirmation bias is the tendency to seek out information that confirms our existing opinions and overlook or ignore information that refutes our beliefs. (thank you Investopedia)

We are all affected by this bias, and we tend to see the world through lens that we build up during our life experiences.

While liking people straight away is nothing bad (actually it can make it easier for the other person to like you back), when you use the same approach in investing money, it can have catastrophic results.

You have a great idea, something like “Let’s buy this financial product, everybody is making money out of it! COUGH Crypto currencies COUGH”.

You go online, check few websites on Google stating that is a great idea, you go for it and…you lose a lot of money for something “you didn’t see coming”.

How can you keep this bias under control?

I have 3 strategies for you:

1- Be aware of it.

Knowing that the confirmation bias exists will help you cooling down and being more skeptical when making an investment decision.

2- Create a checklist.

It sounds boring and simple, but works like a charm.

Include some parameters (level of risk/how much money you want to invest/time horizon could be a start), give them a value and stick to them.

You will pass some great occasions, but you will minimize the chances of buying something only because it sounded cool.

3- Give yourself one extra day before making the final decision.

Investment is a game where you have to stay put most of the time, and take the swing only when all the conditions you want are met.

It is like being a baseball batter who can never be eliminated. You can hit the ball only when it’s worth.

The best way to get into this mindset is to give yourself 24 extra hours after you decide to make an investing decision.

You can re-check the conditions, or just watch a movie and forget about it.

If you decide to go for the investment the day after, with a cool head, it is probably good for you.

These 3 strategies are very basics, but if applied constantly will make you a much smarter investor.

And, if you feel adventurous, you can go for an extra step and check out what is after page one of Google in your investment searches