Making financial decisions? Beware of confirmation bias
When making financial decisions, it helps to collect reliable information, and then move forward. Unfortunately, as humans, we have a tendency to reject reliable information in favor of information that confirms our personal thoughts and feelings. This tendency is known as confirmation bias.
What is confirmation bias?
Confirmation bias is when you pick and choose information to pay attention to based on your preconceived notions. It’s all about cherry-picking information that confirms your own beliefs, or supports your decisions while ignoring information that contradicts your position.
In many cases, confirmation bias blinds you to legitimate criticisms of your choices, since you ignore those items that don’t line up with your current thinking. Additionally, confirmation bias also creates a situation in which you interpret information that might be considered ambiguous in a way that supports your position.
When it comes to making financial decisions, confirmation bias can lead you to stay the course with an investment that has changed fundamentally for the worst, all because you are sure that you can’t make a wrong decision, or because you dismiss the reasons that the investment is no longer a good choice.
There are other situations in which you might make faulty financial decisions based on your biases one way or another. The problem with confirmation bias is that it tends to make you more confident. If you only seek out information that you think supports your position, or if you interpret everything in a way that “proves” you are right, you only become hardened in your financial path — no matter what evidence crops up to the contrary.
This can be problematic when it leads you to make poor financial decisions. You are confident that you are making the right decision, but that confidence might be misplaced since you aren’t taking into account additional evidence that should be used as you make your decision.
Overcoming confirmation bias
If you want to make better investing decisions and improve your financial choices, you need to overcome your confirmation bias. This means that you have to first be aware of it.
Pay attention to your motivations as you make financial decisions. Why are you doing something? What evidence is there for what you are doing? Now, the hard part is looking for opposing viewpoints. Don’t just look for glowing reviews and don’t just read information that agrees with your course of action. Actively seek the other side. Read what others have to say against your course of action. Then, rather than dismiss the information, give it proper thought and due weight.
Next, you have to be willing to change your mind. Perhaps you find more information, and take into account opposing viewpoints. In some cases, you might find that your financial course of action is the correct course, and that there is no reason to change. However, you might also discover that you are doing something that, strictly speaking, isn’t the right thing for your finances. When you realize this, you need to be open to changing course.
Confirmation bias can hold you back from financial freedom. If you don’t overcome confirmation bias, you can very confidently step off a financial cliff… and have a hard time recovering.