"In the case of any person whose judgment is really deserving of confidence, how has it become so? .... Because he has felt, that the only way in which a human being can make some approach to knowing the whole of a subject, is by hearing what can be said about it by persons of every variety of opinion, and studying all the modes in which it can be looked at by every character of mind. No wise man ever acquired wisdom in any mode but this...." ~ John Stuart Mill
Do you seek out information that agrees with your perspective? Of course you do! And investors are certainly no exception to this behavior. Not only do you prefer to seek views that align with yours but you tend to ignore those that do not. Is this healthy behavior? Perhaps it is and perhaps it is not; however, your humble author will suggest that an awareness of this human tendency is healthy and the unawareness of it is not...
"Faced with the choice between changing one's mind and proving there is no need to do so, almost everyone gets busy on the proof." ~ John Kenneth Galbraith
Confirmation bias is the technical name for people's desire to find information that agrees with their existing view. Information
that reinforces favored preconceptions is over-weighted (also known as
self-attribution bias) and any information that conflicts with this
view is ignored. Taken from an investing perspective, possibly you have said something like this: "Nah, it's a short-term blip -- the market will soon return to its most recent pattern."
"There is no conversation more boring than the one where everybody agrees." ~ Michel de Montaigne
Now that you may be at least a bit more aware of your tendency to over-weight information you find agreeable and to under-weight information that you do not, how may confirmation bias be overcome?
- You can begin by attempting to give equal time to information sources with which you agree as to those with which you disagree. No mind has ever grown without stretching beyond its comfort zone. Is it not the blunt stone that sharpens the blade?
- Also beware of the mainstream media because it tends to attach itself to the bias of the herd. Have you noticed a recent shift in the media's overall sentiment from bearish to bullish? The popular view seems to be shifting toward stating The Recession is Over. This is the same media that said, less than one year ago, that the US Economy was headed for The Next Great Depression.
- When you find yourself overwhelmed with reasons to make a decision to do something, force yourself to come up with reasons why you should not do it (or remember the third alternative -- deferring the decision to a later time).
- Simply be aware of what information you consume. If information were food, would your "diet" be healthy? Is it balanced?
- Don't be mentally lazy. Complacency is a breeding ground for other potentially damaging behaviors, such as greed and hubris.
"The difference between what the most and the least learned people know is inexpressibly trivial in relation to that which is unknown." ~ Albert Einstein
Any person with a few minutes of time and minimal education level can find data points to support any given view, especially about something that is, at present time, unknown. No matter how convincing an argument (or how strong your attraction to like-minded perspectives) be sure that your decisions are actually yours.
"There is only one side to the stock market; and it is not the bull side or the bear side, but the right side." ~ Jesse Livermore (hat tip to The Kirk Report)