The Confirmation Bias Trap

Confirmation bias causes investors to seek information that supports their existing beliefs while ignoring contradictory evidence. Overcoming it is essential for objective analysis. [DEFINITION] Confirmation Bias: The tendency to search for, interpret, and remember information that confirms pre-existing beliefs while dismissing or downplaying information that contradicts them. ### How Confirmation Bias Works Once you've formed an opinion about an investment: - You seek sources that agree with you - You interpret ambiguous information as supportive - You remember confirming information better - You dismiss contradicting information as "wrong" or "biased" [EXAMPLE] You buy a tech stock believing it will dominate AI. You follow only bullish analysts, interpret neutral news as positive, dismiss competitive threats as "overblown," and remember every positive data point while forgetting warnings. When the stock falls 40%, you're blindsided. [KEY] The most dangerous part of confirmation bias is that it feels like due diligence. You think you're researching; you're actually just validating. ### Real-World Investment Impacts **Holding through deterioration:** - Missing red flags that contradict your thesis - Waiting too long to sell failing investments - "Averaging down" without honest reassessment **Missing opportunities:** - Dismissing stocks you're bearish on - Not updating views when evidence changes - Stuck in outdated thesis ### Signs You're Trapped Ask yourself: 1. Have I read any bear cases for my bullish positions? 2. Have I read any bull cases for positions I avoid? 3. Do I follow diverse viewpoints or just those I agree with? 4. When was the last time I changed my mind based on new evidence? [WARNING] If you can't articulate the strongest argument against your position, you don't truly understand it. ### Breaking Free from Confirmation Bias **1. Actively seek opposing views:** Before buying, read the best bear case. Before selling, read the best bull case. **2. Steel-man the opposition:** Understand the opposing argument at its strongest, not its weakest. **3. Create a pre-mortem:** Imagine your investment failed. What went wrong? Write it down. **4. Define what would change your mind:** Before investing, specify what evidence would prove you wrong. [TIP] Follow at least one analyst or source who consistently challenges your views. Comfort is a warning sign—you may be in an echo chamber. ### The Pre-Mortem Exercise Before making an investment: 1. Imagine it's one year later and the investment lost 50% 2. Write down all the reasons why this happened 3. Evaluate how likely each reason is 4. Address any concerning scenarios before investing This forces you to consider failure modes you might otherwise ignore. [EXERCISE] You're bullish on an EV company. List three things that could go wrong that you might be ignoring due to confirmation bias. |ANSWER| Possible ignored risks: 1) Competition from legacy automakers ramping up faster than expected. 2) Supply chain issues with batteries or materials. 3) Valuation too high—growth already priced in. 4) Regulatory changes affecting EV incentives. 5) Execution problems scaling production. If you haven't seriously considered each of these, confirmation bias may be at work. ### The Devil's Advocate Method Assign yourself or a friend to argue the opposite position: - If you're bullish, argue the bear case - If you're bearish, argue the bull case - You may discover holes in your thinking [SCENARIO] You've held a stock for 3 years, reading positive research monthly. It's down 60%. A friend suggests you're biased. How should you respond? Honestly examine: 1) Have you read any negative research during these 3 years? 2) Did you dismiss warnings or red flags? 3) Has your thesis been proven wrong but you haven't acknowledged it? 4) Are you holding because of conviction or because you can't accept being wrong? A 60% decline warrants serious reassessment. If you can't find the bear case compelling, you may be deep in confirmation bias.