Source/Contribution by : NJ Publications
Amrita, during her graduation days had read a book, which centered on the life and struggles of a girl from Istanbul, who is also a single mother. The book very beautifully portrayed not just the life of this girl but also personified the history and culture of Istanbul, the chronic tiff between Turks and Armenians, and the Armenian genocide. Amrita was so fascinated with this piece of fiction, that since then, she has always wanted to visit Istanbul, to feel those dingy lanes of the city, the mesmerizing view of the rising sun behind those picturesque mosques, travel in the local ferry and ingest the cool breeze of the sea.
Now years later, Amrita and her husband are planning for their first foreign trip. When Amrita browses among the blogs and videos for places, somehow Istanbul falls in place, it fits into all the parameters they have set.
This is an example of Confirmation Bias. You tend to find and support the information that you already believe in, while ignoring the rest, to strengthen your conviction.
We all are possessed with biases and we are looking for published material/people/videos/ to confirm our biases. And this analogy extends to investing too. You must have come across many investors trapped under the Confirmation Bias spell. Once an investor has developed a conviction in a particular stock or investment idea, he tends to research for material on that stock/idea and pick information that is in alignment with his belief, and generally gives himself a go ahead.
While it is okay to pick a restaurant or travel a country based on our pre-conceived notions, but in investing, the bias will affect the investor financially. An investing decision based on the investor's beliefs can make him lose money.
So, how do you extricate him out of the mental trap:
> Convey to the investor that he is being biased. Although when the investor is firm in his mind, there are chances that the information you hand out to him may not easily penetrate the bias wall. But it is essential for them to look at the other side of the coin too, so you have to show them the mirror, that bias exists. Narrate anecdotes, your own stories, like the one above, that how we tend to be biased for our case and look at only that material which is in line with our viewpoints. Share stories of investors who kept imbibing the confirmatory information, and took investment decisions that didn't go well in the end.
> Ask them to look for information which contradicts their belief. Say for instance, your client has heard from somewhere that the gala time for IT sector is over, and from now the stock prices of IT companies are likely to move in the reverse direction. Your investor has researched for more information on the internet and newspapers, all news and blogs he read are confirming to his opinion. So, now he wants to sell all the IT stocks in his portfolio and an IT sector Mutual Fund which he purchased years back. This investor is clearly under the confirmation bias trap. Urge him to specifically research for news or articles on the bright future prospects of IT sector. This activity will help them realize that there is another perspective that exists, and he should gauge the appropriateness of the alternate prospect too. Alternate opinions will let him look at the broader picture and take an informed investing decision.
Confirmation Bias influences our everyday decisions. A prejudice for a Pasta Arrabiata will lead us to zero down to it after scrutinizing a 10 pager menu, boasting of a 100 delicacies. But this bias should not extend to investing. While researching before investing is a sensible thing to do, but this research should be done from a neutral mindset. The investing decision making activity must be free from all sorts of behavioral biases. Don't let your clients' preconceived ideas and opinions clout their judgment and affect their investing decisions.
