Confirmation bias is a form of cognitive bias, where the human mind preferentially looks for self-validation by taking in information that substantiates a certain decision or thought while filtering out, disregarding, or ignoring any information contrary to that.
Humans tend to seek to validate their choices and decisions, and confirmation bias is the psychological equivalent of cherry-picking facts. For example, someone who likes a certain food or drink might seek information about its health benefits, even if conventional wisdom says it is usually unhealthy to consume.
Despite the similarities, confirmation bias should not be confused with ‘herd behaviour’, where a trader seeks to follow the herd. Confirmation bias is more ‘after the fact’, where traders cherry-pick information that validates their decisions while disregarding conflicting details.
Examples of confirmation bias include:
- Looking for positive information about a certain project and ignoring any negative information about it.
- Purchasing assets that end up appreciating in value and immediately assuming that their investment decisions are always right, despite that one purchase possibly just a mere matter of chance.
- Disposing of assets that end up depreciating in market value, assuming with no evidence that their price will keep dropping.
Confirmation bias is risky, as it could cause a trader to disregard valid and important information when it does not fit their narrative.
