The stock market in April was very good. The Dow went up about 900 points or 2.7%. In this newsletter we are going to be discussing confirmation bias.
However much we wish to believe otherwise, human beings are not always rational. That irrationality sometimes applies to investments. Sometimes our feelings towards a stock are not derived from the intrinsic qualities of the investment itself but rather from personal factors. These people choose to buy or sell a stock not because of the quality of the company but rather because of their personal subjectivity. However, humans want to believe they are rational so they find evidence after the fact that supports or confirms whatever it is they already decided. If these people want to justify buying a stock, they will search out and find good information about the company and ignore any evidence to the contrary. That acceptance of only the evidence that you want to accept is called confirmation bias and can be a significant problem.
One way confirmation bias can manifest itself is in our reaction to the news. The news presents a story that colors our perception of a company and that initial idea persists. That idea persists because humans hate changing their mind because that requires admitting to themselves that they were wrong. In fact, often when people are presented with evidence showing they’re wrong they cling even tighter to their false ideas. Investment wise, people sometimes have “thou shall not touch” positions. They have stock holdings in their personal portfolios that can never be sold, no matter what. This idea does not make economic sense. To maximize profit, you need to be willing to liquidate any position if necessary.
Ultimately confirmation bias can be addressed with self-reflection. When you make an investment decision you have to ask yourself some questions. Why did you make that decision? Did you look at contrary evidence? Do you have a personal stake one way or another in how things are decided?
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Daniel and Eli
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