Confirmation Bias

Here is an article by Jason Zweig in the Wall Street Journal on the effects of "confirmation bias" on investing behavior.

From the article:
...your own mind acts like a compulsive yes-man who echoes whatever you want to believe. Psychologists call this mental gremlin the "confirmation bias." A recent analysis of psychological studies with nearly 8,000 participants concluded that people are twice as likely to seek information that confirms what they already believe as they are to consider evidence that would challenge those beliefs.

The article goes on to suggest ways to combat the tendency.

Learning to manage it is not an easy thing to do but well worth the trouble.

Establishing good habits when you are in the process of evaluating an investing opportunity helps. One of those habits is spending at least 2-3x as much time looking for evidence contrary to a prevailing thesis about an investment. In other words, not only do you need to learn to know when to go against the prevailing "wisdom" of others, it's just as important to know how to challenge your own prevailing "wisdom".

"The first principle is that you must not fool yourself, and you are the easiest person to fool." - Richard Feynman

Check out the full article.

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Confirmation Bias
Confirmation Bias
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