Another behavioural bias which can influence our investing is known as confirmation bias. Confirmation bias is a behavioural flaw of human beings by which once we have made a decision (of any kind), we tend to actively seek information that will confirm our decision. Without realising it, we emphasise information which reinforces our view whilst tending to downplay, avoid or even ignore contradictory information.
As an example: Assuming one already believes in the work of a psychic, one will tend to focus on things said by the psychic that appear to be somewhat accurate whilst overlooking things that are clearly inaccurate. One would do so simply to reinforce one’s view that psychics are the real deal.
Another more everyday example is when one buys a car and then actively seeks and emphasises information which confirms the purchase as a good one, whilst ignoring any information that indicates the contrary. Have a think about it… we all do it, almost every day, in one way or another.
A good anecdotal example of this was seen in the actions of Toll Holdings’ Paul Little prior to the ACCC rejecting his modified bid for Patrick Corporation in mid January 2006. Despite many conversations with the ACCC, it seems Little was only hearing the comments which confirmed his belief that the ACCC would not oppose his bid, to the extent that he had even organised a lunch for institutional investors on the day the bid was opposed! The lunch was abruptly cancelled and Little was nowhere to be seen or heard for a good day or two as he and his advisors came to grips with how significantly they had misinterpreted what was actually going on. So it happens to the best of us!
In the world of investing, confirmation bias prevents us from objectively looking at an investment once we have already made it. Once a stock is bought, we may look for information that confirms the investment as a good one whilst ignoring information that may indicate the investment is in fact a bad or questionable one.
So how do we combat this? Quite simply, it is important after a decision is made to consider all information you can get your hands on, whether it is confirming your original view or not. By recognising this, hopefully you will see when an investment is no longer the right one for you (you will recognise changes as just that and not ignore them) or when a new investment should be made, even though you have decided against buying in the past. Try to never fall in love or out of love with a stock; be objective with new information and reconsider the merits of a stock without looking for information to confirm your current view. Talking to others who have a different perspective can be very helpful.