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Confirmation bias
Confirmation bias is a psychological phenomenon in which people seek, interpret, and remember information that confirms their pre-existing views or beliefs, while ignoring or rejecting information that contradicts them. This can lead to the formation of unrealistic or unproductive beliefs and undermine a person’s ability to make good decisions.
For example, if I believe the Earth is flat, I might search “The Earth is flat, right?” in Google. After seeing the results, I’ll pick an article that confirms this theory and strengthen my belief. Here’s another less extreme example. Your doctor advises against drinking more than two beers a day, but you love beer. So, you search for articles claiming beer is good for you. You find some saying it’s great for the kidneys and that drinking more helps them filter better. Whether this is true is for doctors to decide, but if I want to drink beer, I’ll choose articles that support this idea.
In investment circles, this trend often appears as follows: you might own a stock or cryptocurrency that you’ve grown attached to over time. Human behavior naturally gravitates towards positive news that confirms your choices. This helps build your confidence as an investor and reduces fear of losing money. When browsing forums for information about your asset, you’re likely to eagerly read opinions that support your view. You might critically examine or completely ignore opinions that contradict your own.
The point is that this can lead to subjectivity and ignoring information that points to the contrary. The desire to be right encourages misjudgment and can lead to mistakes, such as continuing to hold an asset even though information indicates that things are not going well with it. But this information is selectively ignored.
Dealing with this tendency isn’t hard, especially once you know it exists. The key is to seek out diverse perspectives and different information sources, actively using them in your decision-making process. You might even intentionally discuss with people who completely disagree with you. This helps you see the situation from different angles and avoid the drawbacks of narrow-mindedness. Always look at information critically and avoid getting emotionally attached to an investment or strategy. This approach helps you make decisions based on facts rather than prejudices or assumptions.
Anchoring bias
Anchoring bias is a psychological tendency that is in a way similar to confirmation bias. The difference is that in confirmation we look for evidence to support our thinking, while in anchoring we insist that our initial decision is true, regardless of new information. Therefore, we are not reassessing the situation, even though it has changed. Take the following dialogue as an example:
– No, I will keep the shares of this company. When I bought them, I studied the company’s information in detail and I think I will make money from it.
– OK, but did you see the last financial report? Growth is slowing, profits are down and market share is shrinking.
– It doesn’t matter, it’s temporary.
This dialogue illustrates how the tendency to anchor can lead to errors in our decisions by ignoring new information and refusing to reassess the situation. If we realize that for psychological reasons we may be anchored to our original decision, we would be wise to change our response, such as:
– You may be right, I will investigate further and reassess the situation.
Markets, the economy and the global environment are constantly changing, so it is important not to remain static and stubborn. We must be flexible, dynamic and constantly ready to reassess the situation, especially when new information affects our investments. Depending on the assets you own and how often you trade them, you may need to review and reassess the information even daily .
