Confirmation bias is the psychological term for the all-too human tendency to mainly see the information that confirms what we already believe. We often only read the books, newspapers, and magazines that agree with us, watch the television channels that concur with our pre-existing views of the world, hang out with friends who don’t upset us by expressing “dumb” opinions.
A recent study suggested that people are “twice as likely to seek out information that confirms what they already believe as they are to consider evidence that would challenge those beliefs…. It is simply easier to focus our attention on data that supports our hypothesis, rather than to seek out evidence that might disprove it.” (The Wall Street Journal, November 14, 2009, The Intelligent Investor, “Ignoring the Yes-Man in Your Head.”)
An unfortunate effect of confirmation bias is that even if we are cautious, even when we go looking for more data before we make that final choice, we often just end up “seeing” more data that confirms the direction we were headed in originally. Thus we become even more certain, more confident, but without any real objective reason: “Each new fact makes you inclined to find another that resembles it, reducing the diversity of your data.”
How to counteract confirmation bias?
– Ask yourself “What if I am wrong? Totally and absolutely wrong? What then?”
– “Are there others who see it differently? Why do they think that way?”
– “What are the odds my analysis and decision are wrong? 1 out of 20? 1 out of 10? 1 out of 5? 1 out of 3? Even geniuses are off some percentage of the time, only fools think they are right all the time. Admitting that there is a chance that we could be wrong frees our ego energy from defending our analysis “to the death” and opens our minds to other possibilities, providing important psychological cover to allow us to back off a stance.
– Understand that even if your analysis and decision are 100% “right,” even good decisions can sometimes have bad or unexpected outcomes. Be prepared for that possibility. It might be the right decision to make a big bet that an honest coin will not flip heads 5 times in a row, but a certain percentage of the time, five heads will happen.
– Decide in advance what defines success or failure. Clearly articulate the desired outcome. Often we get fuzzy after the fact on what the parameters and goals of our original decision were because getting vague helps us avoid admitting we are wrong. With investors, it’s writing down what would make you liquidate, what price decline, what failure to reach certain benchmarks within what timeline. Even professional investors tend to cling to positions in the face of overwhelming evidence that their original decisions were faulty.
“If you can trust yourself when all men doubt you, But make allowance for their doubting too…” — Rudyard Kipling, “If”
“Listen to those that seek truth, doubt those that claim to have found the only truth.” — Unknown
“Beware the man with no doubts.” — Nathan S. Collier