Behavioral finance is something I’ve talked about a few times recently. It’s basically the study of how people’s biases affect how they run their finances. There are a number of recognized behavioral traits in investing. One to watch out for is confirmation bias.
An investor buys 100 shares of XYZ Corp. because of a positive article he read about the stock. Having done that which do you think is going to be more useful, reading positive or negative articles about XYZ? It’s probably the negative ones that will be helpful. Those articles will point out what to watch out for. But we have a tendency to instead read the positive articles about our investment. That behavior is called ‘confirmation bias”. We want our decision to be confirmed rather than disputed. It’s hard to read bad stuff when we’ve already committed our money, so we just don’t.
Overcoming confirmation bias will help us understand the whole story about our investment. It can help us know when it might be time to sell, or more importantly, to not purchase a security in the first place. If you’re reluctant to read that downer story about your investment, it’s best not to let that stop you. Overcoming confirmation bias will help you become a more informed investor, which is never a bad thing.