What is our tendency to search for or interpret information in a way that confirms what we already believe answer with two words?

Imagine that you have tried to reach a friend with whom you have an ambivalent relationship by phone or email, leaving messages, yet receiving no call in return. In a situation like this, it is easy to jump to conclusions in an intuitive manner that your friend wants to avoid you. The danger, of course, is that you leave this belief unchecked and start to act as though it were true.

Confirmation bias occurs from the direct influence of desire on beliefs. When people would like a certain idea or concept to be true, they end up believing it to be true. They are motivated by wishful thinking. This error leads the individual to stop gathering information when the evidence gathered so far confirms the views or prejudices one would like to be true.

Once we have formed a view, we embrace information that confirms that view while ignoring, or rejecting, information that casts doubt on it. Confirmation bias suggests that we don’t perceive circumstances objectively. We pick out those bits of data that make us feel good because they confirm our prejudices. Thus, we may become prisoners of our assumptions. For example, some people will have a very strong inclination to dismiss any claims that marijuana may cause harm as nothing more than old-fashioned reefer madness. Some social conservatives will downplay any evidence that marijuana does not cause harm.

Confirmation bias, anxiety, and self-deception

Confirmation bias can also be found in anxious individuals, who view the world as dangerous. For example, a person with low self-esteem is highly sensitive to being ignored by other people, and they constantly monitor for signs that people might not like them. Thus, if you are worried that someone is annoyed with you, you are biased toward all the negative information about how that person acts toward you. You interpret neutral behavior as indicative of something negative.

Wishful thinking is a form of self-deception, such as false optimism. For example, we often deceive ourselves, such as stating: just this one; it’s not that fattening; I’ll stop smoking tomorrow. Or when someone is “under the influence” he feels confident that he can drive safely even after three or more drinks.

Self-deception can be like a drug, numbing you from harsh reality or turning a blind eye to the tough matter of gathering evidence and thinking. As Voltaire commented long ago, “Illusion is the first of all pleasure.” In some cases, self-deception is good for us. For example, when dealing with certain illnesses, positive thinking may actually be beneficial for diseases such as cancer, but not diabetes or ulcers. There is limited evidence that believing that you will recover helps reduce your level of stress hormones, giving the immune system and modern medicine a better chance to do their work.

In sum, people are prone to believe what they want to believe. Seeking to confirm our beliefs comes naturally, while it feels strong and counterintuitive to look for evidence that contradicts our beliefs. This explains why opinions survive and spread. Disconfirming instances are far more powerful in establishing the truth. Disconfirmation would require looking for evidence to disprove it.

How to minimize confirmation bias

The take-home lesson here is to set your hypothesis and look for instances to prove that you are wrong. This is perhaps a true definition of self-confidence: the ability to look at the world without the need to look for instances that please your ego.

For group decision-making, it is crucial to obtain information from each member in a way that they are independent. For example, as part of a police procedure to derive the most reliable information from multiple witnesses to a crime, witnesses are not allowed to discuss it prior to giving their testimony. The goal is to prevent unbiased witnesses from influencing each other. It is known that Abraham Lincoln intentionally filled his cabinet with rival politicians who had extremely different ideologies. When making decisions, Lincoln always encouraged vigorous debate and discussion.

What Is Confirmation Bias?

Confirmation bias is a term from the field of cognitive psychology that describes how people naturally favor information that confirms their previously existing beliefs.

Experts in the field of behavioral finance find that this fundamental principle applies to investors in notable ways. Because investors seek out information that confirms their existing opinions and ignore facts or data that refutes them, they may skew the value of their decisions based on their own cognitive biases. This psychological phenomenon occurs when investors filter out potentially useful facts and opinions that don’t coincide with their preconceived notions.

Key Takeaways

• Confirmation bias is the tendency of human beings to actively search for, interpret, and retain information that matches their preconceived notions and beliefs.
• The confirmation bias concept comes from the field of cognitive psychology and has been adapted to behavioral finance.
• Confirmation bias flourishes because it's an efficient way to process information, it promotes self-esteem, and it eases stress by eliminating conflict and contradictions.
• Investors should be aware of their own tendency towards confirmation bias so that they can overcome poor decision-making, missing chances, and avoid falling prey to bubbles.
• Seeking out contrarian views and avoiding affirmative questions are two ways to counteract confirmation bias.

Understanding Confirmation Bias

Confirmation bias affects perceptions and decision-making in all aspects of life, but it can create particular problems for investors. When researching an investment, they might inadvertently look for or favor information that supports their preconceived notions about the asset or strategy and fail to register or to under-weigh any or data that presents different or contradictory ideas. The result is a one-sided view and a self-reinforcing loop. Confirmation bias can thus cause investors to make poor decisions, whether it’s in their choice of investments or their timing of trades.

Confirmation bias helps explain why investors do not always behave rationally and perhaps supports arguments that the market behaves inefficiently. The syndrome is a source of investor overconfidence and helps explain why the bulls tend to remain bullish and the bears tend to remain bearish regardless of what is happening in the market.

Types of Confirmation Bias

Confirmation bias can be broken down into several sub-categories. Here are some of the most common.

Biased Research

This sort of confirmation bias relates to making a decision or adopting a view and then seeking information that supports it. This can happen unconsciously: Even in the way a person searches for evidence or phrases a question can reflect the preference, and so yield the proof they want.

Biased Interpretation

This variety of confirmation bias relates to how people process and evaluate data. Typically, evidence that conflicts with preconceptions causes discomfort and so is ignored or given little consideration—while confirming evidence is accepted uncritically or at least more readily. This disparity in interpreting info explains why research so often fails to change people's opinions on issues.

Biased Recall

This type of confirmation bias relates to memory. Past experiences and events influence current thinking and behavior, of course. But people remember things in selective ways, and often that selectivity serves to back up current beliefs—as opposed to the current beliefs being shaped by the memories. In other words, we recall the past in a way that reinforces the present. Some theories also suggest that information confirming our biases is more likely to remain in our memories, and information contradicting them is more likely to be forgotten or repressed.

A related syndrome to confirmation bias is belief perseverance or persistence: the inability of people to change their own belief even upon receiving new information or facts that contradict or refute that belief. Actively resisting news that goes against what we already think or believe, in effect.

Why Does Confirmation Bias Exist?

What causes confirmation bias, and why do humans have it? Although it can cause problems, it seems to make life easier too. Below are a few reasons why.

It's Efficient

It's an information jungle out there, and it keeps getting thicker all the time in our digital media era. We don't have the time or the energy to evaluate everything equally to form unbiased decisions. By encouraging us to look for or accept certain types of info, confirmation bias frankly helps cut through the clutter. It's an efficient, if limited, way to edit evidence and process data.

It Helps Self-Esteem

People like to feel good about themselves—that they're intelligent, decent, and right. Discovering that they're incorrect makes people feel bad about themselves. Therefore, people will seek information that supports their existing opinions, decisions, and desires. In other words, confirmation bias is a confidence booster. It's no surprise that, while anyone can be prone to it, confirmation bias often can be found in anxious individuals with low self-esteem.

It Alleviates Stress

"The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function,” F. Scott Fitzgerald wrote in “The Crack-Up,” a 1936 essay. Ah, but for most people, maintaining a pair of contradictory beliefs causes cognitive dissonance—a state of mental distress and unease that often impedes functioning. To minimize this dissonance, confirmation bias kicks in. By reinforcing one set of facts—what we want to see, hear, or believe—it alleviates the paralyzing conflict.

Impact of Confirmation Bias on Investments

Confirmation bias can be particularly dangerous for investors. Reflecting the direct influence of desire on beliefs as it does, it causes irrational behavior—and investing is one area where emotion emphatically has no place.

While countless ways exist for confirmation bias to (adversely) affect investment decisions, here are three common effects.

Missing Chances

Confirmation bias encourages investors to remain preoccupied with their own prejudices and stay in their comfort zones. As a result, they might easily miss out on new (to them) strategies, products, and investment opportunities. They might cling to notions like "never dig into principal" or "never go into debt," even when their individual circumstances dictate that doing the opposite makes more financial sense.

Disregarding Diversification

Diversification is a technique that allocates investments across various financial instruments, industries, and asset classes that would each react differently to the same event. Although it mainly aims to reduce risk, it can maximize returns (by avoiding losses) as well. Confirmation bias can encourage investors to become obsessed with a few companies or a few investment types. This causes them to ignore diversification and concentrate their holdings in a single stock or asset class, thus exposing themselves to greater risk.

Being Victimized by Bubbles

Bubbles occur when prices for a particular asset or investment rise far above its real value in increasingly speculative trading. Since bubbles are all about investors buying "because everyone's doing it," people with confirmation bias are prone to invest more in asset bubbles, swayed by the consensus view—and ignoring any contrarian voices warning that the uptick is getting out of hand, that the elevated prices aren't justifiable or sustainable. So they're likely to incur a lot of financial damage when the bubble pops, as it inevitably does.

The speculative activity that inflates investment bubbles is part of another important concept in behavioral finance, called herd behavior or mentality. It states that people tend to mimic the financial actions of the majority, following the crowd, so to speak. Herding is notorious in the stock market as the cause behind dramatic rallies and sell-offs.

Example of Confirmation Bias

Suppose an investor hears a rumor that a company is on the verge of declaring bankruptcy. Based on this information, the investor considers selling the stock. When they go online to read the latest news about the company, they read only the articles that repeat the likely bankruptcy scenario and miss a story about a promising new product the company has just launched that is expected to increase sales. Instead of holding the stock, the investor sells it at a substantial loss—just before it turns around and climbs to an all-time high.

Overcoming Confirmation Bias

Seek contrary advice: The first step to overcoming confirmation bias is to have an awareness that it exists. Once an investor has gathered information that supports their opinions and beliefs about a particular investment, they should seek alternative ideas that challenge their point of view. It is good practice to make a list of the investment’s pros and cons and reassess it with an open mind.

Avoid affirmative questions: Investors should not ask questions that confirm their conclusions about an investment. For example, an investor who wants to buy a stock because it has a low price-earnings (P/E) ratio would be affirming their findings if they only asked their financial advisor about the company’s valuation. A better approach would be to ask the broker for more information about the stock, which can be pieced together to form an unbiased conclusion.

What is our tendency to search for or interpret information in a way that confirms what we already believe?

What is the tendency to look for information that supports?

What is confirmation bias in research?

What is confirmation bias and examples?