Confirmation bias and the desire to be right

Each card has a letter on one side and a number on the other side. Your task is to verify, by turning over as few cards as possible, the truth of the following proposition: “All cards with a vowel on one side have an even number on the other side.” Which of the cards do you turn over?

I will tell you the answer at the end of this article. Psychologists have used this experiment to show that we frequently fall victim to what is known as confirmation bias: We tend to see what confirms our presuppositions, our views, our opinions. This is because we interpret information selectively, giving those arguments that are in line with our opinions more weight than others, or because we belittle information that contradicts our opinions. We do this, for instance, when it comes to fake news and conspiracy theories - whether it is “chemtrails” in the sky purportedly used to deliberately poison people, or alleged Freemasons in politics. Confirmation bias occurs whenever we are prejudiced and become even more prejudiced as time goes by. It also happens when decision makers ignore, or interpret in ways that suit them, facts that are incompatible with their opinions. Or, when recruiters, in the process of filling vacancies, highlight positive aspects of the résumés of people they like but find fault with candidates they do not like. There is no denying the fact that the more complex a decision, the bigger the risk of confirmation bias.

Putting a favorable construction on bad investment decisions

Confirmation bias is also frequently encountered in finance. For instance, when one keeps a stock that has turned out to be a “damp squib” because one is reluctant to admit to oneself that the decision to buy it was wrong. One still does not see further losses as a consequence of having made a bad buy but as a sign that the stock has become even more undervalued. One may even end up buying more shares. The following phenomenon is also due to confirmation bias: The more time one spends thinking about whether or not to buy a stock that appears attractive at first sight, the likelier one is to come up with arguments in favor of the investment - one simply ignores arguments against it, or reinterprets them in such a way that they become arguments for it.

Tips

As you can see, confirmation bias is inherent in human reasoning. In order not to fall victim to it, we need to consciously remind ourselves of its existence. Hence, my recommendation: Whenever you make a (financial) decision consciously ask yourself: What pieces of information or arguments are there that contradict my assumption, assessment or opinion? In how far could I have a wrong or distorted perception of things? You can make this easier for yourself by looking for sparring partners - people who do not share your opinion and who help you, through a process of interaction, see things more objectively. Collect information in an open-minded and unbiased manner and ask yourself afterwards: What bits of information have I so far ignored or given less weight to? All this will help you make much better decisions - not only in investment contexts but in life in general.

This article was published in the Austrian business magazine GEWINN. Read the original article here (in German).